By Victor Reklaitis, MarketWatch
Looking for shrewd investments for 2016?
Or perhaps you’re just searching for low-cost, vanilla index funds.
Here are a few exchange-traded funds that cover that spectrum. MarketWatch asked several investing experts to pick three ETFs each for the new year—funds that they expect will outperform, serve long-term investors well, or that are at least worth keeping an eye on.
FactSet’s Dave Nadig likes JETS, PAEU, IGHG
The U.S. Global Jets ETF /zigman2/quotes/207744796/composite JETS -1.63% is the “only true pure play covering airline stocks, which are poised to benefit from sustained lower oil prices,” said Dave Nadig, FactSet’s director of ETFs. JETS isn’t cheap after rallying following “some summer doldrums,” but “it’s still a solid pick for an industry delivering some of the best earnings reports we’ve seen in a long time,” Nadiq told MarketWatch in an email. He warns the ETF is “a bit hard to love” as it “doesn’t trade particularly well” and ranks as “a little pricey” with its expense ratio of 0.60%.
The “brand-spanking new” Pacer Autopilot Hedged Europe ETF “could give investors the best of both worlds—unhedged when the dollar is weakening, hedged when the dollar is strengthening,” Nadig says. This play on European stocks dynamically chooses whether to hedge out its euro exposure /zigman2/quotes/210561242/realtime/sampled EURUSD +0.1441% or not based on moving average signals. Nadig cautions PAEU is expensive as it charges 0.65%. “I wouldn’t be looking at this right away, but if volumes and assets increase, it’s an intriguing take on what’s been one of the hottest trends of the past few years,” he said.
The ProShares Investment Grade Interest Rate Hedged ETF /zigman2/quotes/202335373/composite IGHG +0.15% “might just be the ‘sweet spot’ fund for the next year on the corporate bond side,” Nadig said. It stays out of junk, it’s light on energy exposure and heavy on financials.
S&P Capital IQ’s Todd Rosenbluth likes IJR, USMV, SJNK
One of 2016’s biggest events is expected to be November’s presidential election, and that is one reason to bet on the iShares Core S&P Small-Cap ETF /zigman2/quotes/208653303/composite IJR -1.20% , says Todd Rosenbluth, director of ETF and mutual fund research at S&P Capital IQ + SNL Financial. “Historically small caps have beaten large caps during [a] presidential election year,” he told MarketWatch in an email. His team also anticipates growth in earnings per share to be particularly strong for small-capitalization stocks , he said. Strategists often say that the small fry are more sensitive to the U.S. economy , which is looking healthier than other developed economies as the new year approaches.
Big-cap stocks also deserve to attract investor money, according to Rosenbluth. He suggests buying the iShares MSCI USA Minimum Volatilty ETF /zigman2/quotes/203326574/composite USMV +0.41% , arguing that U.S. large caps are “likely to be volatile in 2016” but still end the year higher. USMV “is a low-cost, diversified way to tilt to low-vol stocks in each sector,” he says.
While high-yield bonds, also known as junk bonds, spooked many investors in December, Rosenbluth doesn’t sound fazed as he recommends the SPDR Barclays Short Term High Yield Bond ETF /zigman2/quotes/208033218/composite SJNK +0.52% . “We still see default rates low and think with rising rates investors will want to get higher income,” he says. SJNK “offers diversification and exposure to both.”
Morningstar’s Ben Johnson likes EEMV, plus VTI, BND and their rivals
The first two ETF picks from Morningstar’s Ben Johnson often get recommended as part of what’s described as the “ lazy three-fund portfolio .” He recommends a U.S. total stock market ETF and a core bonds ETF. For the former, he recommended the Vanguard Total Stock Market ETF /zigman2/quotes/202677318/composite VTI +0.33% , the Schwab U.S. Broad Market ETF /zigman2/quotes/203539416/composite SCHB +0.49% or the iShares Core S&P Total U.S. Stock Market ETF /zigman2/quotes/209837164/composite ITOT +0.28% , praising how they all deliver “instant access to the entire U.S. equity market at a cost that is next to nothing.”
For the bonds bet, he recommended either the Vanguard Total Bond Market ETF /zigman2/quotes/203732548/composite BND +0.29% or the iShares Core U.S. Aggregate Bond ETF /zigman2/quotes/200660887/composite AGG +0.26% , saying even with today’s low expected returns, it’s “absolutely vital not to discount the role that a high-quality bond fund plays in a diversified portfolio.”
As a “more opportunistic” play, Morningstar’s director of global ETF research recommended the iShares MSCI Emerging Markets Minimum Volatility ETF /zigman2/quotes/208305552/composite EEMV +1.27% . Johnson said investors are right to fear emerging market stocks given their recent slides, but brings up Warren Buffett’s advice about turning “ greedy when others are fearful .” This EM fund aims to provide a smoother ride for investors by holding less-volatile stocks. It manages to screen out some commodity-dependent state-owned enterprises, Johnson notes. The fund has about 19% in Hong Kong stocks, 17% in Taiwan stocks, 13% in South Korean names and then less than 10% in other EM nations’ equities.
Severian Asset Management’s Sam Lee likes IELG, HYS, EEMV
While the iShares Enhanced US Large-Cap ETF isn’t unique in trying to hold cheap stocks with high earnings quality, it does that better than its rivals, according to Sam Lee, managing member at fee-only adviser Severian Asset Management. “Lots of funds have been launched in recent years that attempt to do the same thing, capitalizing on the so-called ‘smart beta’ trend (really just another name for factor investing), but none have the same combination of potency, low cost, and active management,” Lee told MarketWatch in an email.
Lee, previously an ETF strategist for Morningstar, also recommended the Pimco 0-5 Year High Yield Corporate Index ETF /zigman2/quotes/205210165/composite HYS +0.62% . The fund’s underlying index has a yield to maturity of 10.12%, according to Bank of America data as of mid-December, and that is “an attractive yield considering the U.S. economy seems robust and much of the selling in junk bonds stems from misplaced fears about liquidity,” Lee says. He warns HYS “doesn’t benefit as much from falling interest rates during periods of stress,” and it will “bear the brunt of credit spread widening.”
Lee is in agreement with Johnson as he praises the iShares MSCI Emerging Markets Minimum Volatility ETF. “It has a great combination of reasonable fees (0.25%) and a sensible strategy that targets lower volatility companies,” he wrote. “The bias to defensive stocks means EEMV underweights leveraged, lower quality stocks.”
Read more: Look back at 11 ETF picks for 2015