Exchange-traded products (ETPs) are mostly promoted to long-term investors as simple, cheap portfolio-construction and maintenance tools. Although correct, that view of ETPs is narrow and, frankly, a little dull. They are also effective trading tools to capitalise on short-term opportunities.
That is the case with overseas shares. Increasing exposure to international equities has been a recurring theme of this column for almost two years. I was most bullish on US equities, then those of Japan and Europe. ASX-listed ETPs over these countries’ main sharemarket indices were suggested.
The iShares Core S&P 500 ETF is up 20 per cent over the year to June 30, 2014. The iShares Europe ETF rallied 25 per cent over that period, and the iShares MSCI Japan ETF returned 6 per cent, with stronger gains over two years. A stubbornly high Australian dollar has weighed on returns.
By effectively investing in a basket of stocks through an ETP, those gains came with less risk than investing in individual stocks. Domestically, I mostly prefer investing in companies rather than indices. Internationally, ETPs are ideal for short-term, tactical asset-allocation strategies.
I still favour higher portfolio allocations to international equities, although caution against being overweight US equities at these levels. It’s time to take profits. Japan and Europe still look interesting and some emerging markets have greater appeal at current level.
Here are five themes and the associated ETP to consider:
It’s hard not to like the short- and long-term outlook for leading global healthcare companies as the population ages. The iShares Global Healthcare ETF has returned 24 per cent over one year to June 30, 2014 and an average annualised 25 per cent over three years. About two-thirds of its exposure is in global pharmaceutical companies; the rest is medical stgices. It’s a simple way to increase portfolio exposure to healthcare, although returns will likely moderate from such high recent levels.
2. Soft commodities
The other defining trend of our era – in addition to an ageing population – is the growth in middle-class Asian consumers. Another 2.7 billion of them by 2030, if government forecasts are correct, means sharply higher demand for food and thus soft commodities. The BetaShares Agriculture ETF (currency hedged) provides exposure to sugar, soybeans, corn and wheat – commodities that will benefit as demand for food, drinks and textiles in Asia grows. It has a negative 7.3 per cent return over one year. Bargain hunters might find the ETP interesting at these levels.
3. Emerging markets
I’m becoming more bullish on Chinese and Indian stocks. Chinese June-quarter GDP data was slightly stronger than expected and suggests government stimulus efforts are working and that China can maintain a 7.5 per cent growth rate. India, in particular, looks interesting after reform talk.
The iShares MSCI BRIC ETF invests in mostly large companies across Brazil, Russia, China and India. The year-to-date return is negative 1.15 per cent to June 30. As western markets such as the US race higher and emerging markets languish, the case to tilt international equity exposure towards stgeloping nations is building.
With so much talk about gold, it is easy to overlook the other main precious metals: silver, platinum and palladium. This column has written about platinum previously for The Bull. I wrote in February 2014: “I prefer platinum and palladium (over gold and silver) principally because of possible supply problems amid strike action at South African mines. A pick-up in European auto demand and strong demand from Chinese jewellery buyers in 2014 are other positives.”
That view stands. ETF Securities believes the current correction in platinum prices will be short-lived, possibly providing a buying opportunity. Its ASX-listed ETFS Physical Platinum ETF has returned 2.5 per cent year-to-date and 14 per cent annually over two years to July 15, 2014.
5. Australian banks
The big-four banks are ripe for a share-price pullback after stellar gains in the past few years. It may already be underway as the market is spooked by observations in the Murray inquiry’s interim report and the potential for a major shake-up of Australia’s financial services sector. I expect any pullback or share-price correction in the big four-banks, if it gets that far, to be short-lived.
Traders might find an ETF over bank stocks, such as the Market Vectors Australian Banks ETF, is a convenient way to capitalise on any sell-off and subsequent rebound in bank stocks. It’s probably too early yet – the index on which that ETF is based is up 26 per cent over one year to June 30. But it’s worth considering how to take advantage of any fall in bank share prices using an ETF, especially if your portfolio already has exposure through direct share holdings of bank stocks.
Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply stock recommendations. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at July 16, 2014.