3 ETFs to Leverage to an Improving Global Economy

Published Fri, 13 Dec 2013 23:45

There are some sectors, such as telecommunications and consumer staples, that have outperformed in the recent years due to the global economic downturn that began with the debt explosion of the global financial crisis and all the uncertainty it created in the United States and Europe especially. However, with unemployment rates falling, new job creation rising and economic growth returning, rotating out of these sectors is now under way.

Which begs the question, which sectors are poised to benefit from a sustained economic recovery after 5 years of tepid sub-normal growth? While consumer discretionary stocks, as well as leisure exposed plays that involve travel as well as property trusts and groups prosper during these times, the surest way to gain exposure to a growing economy is through the lenders and financial institutions. With that in mind, the following ETFs have some attractive characteristics in this space, including strong yields, potential for capital growth and diversified earnings streams.

3 Year Total Return Graph

Bet on the U.S.
Despite all the talk about the rise of China and it’s meteoric rise in terms of GDP growth, the facts are that the largest economy in the world is still that of the United States, and therefore any world economic recovery is highly dependant on the performance of U.S. stocks and businesses. With U.S. unemployment finally falling and “green shoots” of economic growth being observed in many sectors, including shale gas and technology, exposure to the giants of the U.S. corporate landscape makes sense. One of the best balanced ETFs that plays this theme while offering a high-yielding investment with the ability to grow capital as well is the Guggenheim Multi-Asset Income ETF (NYSE: CVY). While not showing the rocket-like price appreciation of some of the over-hyped IPO’s of the recent year, this ETF is a strong performer delivering consistent growth while distributing a steady dividend. The portfolio as a whole is well spread across real estate, common stock and foreign owned corporations all operating in the United states. These approximately 100 securities provide a strong exposure to the U.S. economy.

Hit the Banks
Banks are rightly seen as bellwethers of the health of an economy, and therefore are among the first to be sold down in the event of a slowdown as credit growth slows and margins compress as a result of bad debts rising. Banks are also among the first to benefit when a recovery takes hold as businesses and consumers once again borrow money to invest, grow and spend. An ETF that is close to a pure financial market exposure is the iShares S&P U.S. Preferred Stock Index Fund (NYSE: PFF). While the fund appears strongly diversified because of the over 200 stocks that comprise it, the reality is that only around 40 companies are represented through multiple instruments. These financial instruments can include preference shares, company issued bonds and other methods of preferred debt or equity. The strategy pays handsome dividends with yields of up to 7.4% achieved in the last five years. While over-concentration in any area of the share market is not a desirable investment strategy, to gain exposure to the banking and financial sector through a diversified ETF such as this one as part of an overall portfolio can be a good way to invest in a trend such as an economic recovery backed by lenders.

Go Global
While it’s true that the U.S. is the worlds largest economy, the developed world extends much further and there are standout businesses to be found in every corner or the globe that for one reason or another, have not listed on the Dow Jones or NASDAQ. In that vein, an ETF which harnesses the strengths of the world economy as different nations and multinationals identify and develop their own relative comparative advantages make intuitive and logical sense to investors. A standout of this theme is the First Trust DJ Global Select Dividend Index Fund (NYSE: FGD). The fund aims to follow high-yielding stocks from all over the developed world because of their potential for regular distributions and capital growth. The fund is attractively diversified, with North America, Western Europe, Asia and Australia all represented, without a bias to any particular market. There is also sector diversification with telecommunications, financials, resources and technology stocks all making the grade. The great benefit of this fund is that even in bear markets, there are bright spots to be found, and a well diversified exposure to a broad base of markets and sectors means that while growth may lower in some markets, there should be an alternative engine to drive your portfolio forward in others. The returns of this seemingly conservative approach have been anything but, with a standout year coming in 2010 when a 4.5% yield was supported by a 12.3% return overall.

Investing in an economic recovery is not as easy as it sounds, but exposure to rebounding markets through an ETF exposed to the financial sector is a rational choice that harnesses the returned growth that appears while also protecting against future downturns through diversification of stocks within that ETF. For this reason the standout of the group seems to be the First Trust (FGD) vehicle, though a higher risk and higher reward proposition is the Guggenheim product (CVY), which has the potential to significantly outperform if economic growth returns in a meaningful way.

ETF name ISIN Price TER YTD Dividend Freq Ex Div Date Dividend Yield
iShares S&P U.S. Preferred Stock Index Dividend iShares S&P U.S. Preferred Stock Index on Bloomberg iShares S&P U.S. Preferred Stock Index PFF PFF Dividend iShares S&P U.S. Preferred Stock Index on Reuters iShares S&P U.S. Preferred Stock Index ETF on Yahoo! Finance US4642886877 39.36 USD 0.47 5.57Monthly10/03/20165.12
Guggenheim Multi-Asset Income Dividend Guggenheim Multi-Asset Income on Bloomberg Guggenheim Multi-Asset Income CVY CVY Dividend Guggenheim Multi-Asset Income on Reuters Guggenheim Multi-Asset Income ETF on Yahoo! Finance US18383M5067 19.07 USD 0.65 8.81Quarterly09/26/20165.10
First Trust DJ Global Select Dividend Dividend First Trust DJ Global Select Dividend on Bloomberg First Trust DJ Global Select Dividend FGD FGD Dividend First Trust DJ Global Select Dividend on Reuters First Trust DJ Global Select Dividend ETF on Yahoo! Finance US33734X2009 22.85 USD 0.60 8.67Quarterly09/21/20163.29