The ETF industry saw lots of volatility in the first quarter of this year thanks to the start of the QE taper, polar vortex in North America, deepening slowdown in China, return of deflationary worries in Euro zone and the geo-political issue in Russia which had a ripple effect in other countries. All these have goaded the „risk-off“ investing theme in investors‘ minds last quarter and should be felt in the second quarter as well.
If these were not enough, investors should note that the months of April and May are normally seasonally downbeat for the U.S. stock markets. After a mid-month tax deadline, investing in April normally loses some steam. On a separate note, April denotes the last month of the six-month long seasonally bull phase of the stock markets.
To add to this, we have also witnessed some sort of sector rotation lately, with some high-flying sectors like technology being hard hit, and defensive sectors like utility gaining strength (read: 3 Utility ETFs Surviving the Market Turmoil ). Meanwhile, the Fed’s Chair hinted at hiking short-term interest rate in mid 2015, leaving an impact on the bond market.
Thanks to all these worries, one needs to be hawk-eyed while choosing ETFs for a portfolio in Q2. Thus, identifying some ETF winners would be a prudent idea to make an investment decision.
Here we focus on three funds with favorable Zacks ETF Ranks and moderate risk outlook that you can capitalize on in order to enrich your portfolio:
iShares S&P Mid-Cap 400 Value ETF ( IJJ )
While U.S. small caps had an astounding run last year, making the segment slightly overvalued, the large-cap segment is vulnerable to ongoing global shocks. Amid such a backdrop, investors should have a middle-of-the-road approach choosing mid-cap ETFs.
This often-ignored slice of capitalization offers the best of both worlds. Lesser vulnerability to international tremors compared to larger ones and lower risk profile than their small-cap counterparts make mid-cap ETFs a safe bet. The U.S. economy appears as one of the most stable and decently growing global regions this year.
Mid-cap ETFs should benefit from this improving U.S. economy. Also, investors should look for some value focus even in this slice of the market, given heightened global volatility. And to do this, IJJ could a good way to target the best of the segment.
The fund zeroes in on the S&P MidCap 400 Citigroup Value Index for exposure to about 292 domestic mid-cap names having diversified exposure to various sectors. The product is well spread out as it puts about 10.27% of its assets in the top 10 holdings with no stock accounting for more than 1.27% of the basket. Hollyfrontier (1.25%), SL Green Realty (1.20%) and Fidelity National (1.13%) occupy the top three positions.
However, the product is heavily dependent on financials, which make up for 29% of the total assets, while industrials, information technology and consumer discretionary round out the next three spots. IJJ is one of the most popular and liquid choices in the mid-cap value ETF list.
The fund has returned 3.60% year-to-date. It has a Zacks ETF Rank of 2 (Buy) with low risk outlook.
DB Agriculture Long ETN ( AGF )
The year 2013 was not good for agricultural commodity investing thanks to easing supply concerns and favorable weather conditions which caused this fund to hurtle lower. However, the scenario has been turning around since the start of 2014 on supply crunch for some soft commodities and global recovery which led to enhanced consumption (read: 3 Commodity ETFs Surging on Russia Sanctions ).
While we currently have some top-ranked Zacks ETFs in the agricultural space including T eucrium Corn ETF ( CORN ) based on one of the most important U.S. crops, corn, and some sugar ETFs, we prefer to bet on all top-performing agricultural-based commodities through a single investment, AGF (Read: Zacks ETF Rank Guide ).
AGF delivers an array of various soft commodities such as corn, sugar, soybean, and wheat all of which have been exhibiting a favorable pricing trend currently. Corn and wheat are gaining on the Ukrainian issue and inclement weather in some major growing regions. Though, short-term in nature, we expect these price drivers to remain in place in the quarter ahead.
With AUM of only $3.5 million, the ETN is unpopular and less liquid in the agricultural commodities space. The product is expensive when compared to other choices in the segment. It charges investors 75 bps in fees per year and an extra cost in the form of wide bid/ask spread thanks to low daily trading.
The fund has a Zacks ETF Rank of 3 (Hold). AGF was up about 45% over the last one month against 3.5% gain in the broader and the largest agro ETF PowerShares DB Agricultural ETF ( DBA ).
iShares MSCI EAFE Value ETF ( EFV )
Investors with significant exposure in the U.S. can use EFV for geographic diversification of their portfolio. With an asset base of $2.5 billion, EFV is among the largest ETFs in the foreign large cap equities space. The fund looks to offer exposure to the MSCI EAFE Value Index.
The Index seeks to pick value-oriented securities having higher book value to price ratios, higher forward earnings to price ratios, higher dividend yields and lower long-term growth rate projections than securities that have a growth focus.
More than 65% of the holdings are invested in Europe with UK being the front runner accounting for a quarter of the portfolio. Japan (19%), France (11%) and Germany (10.59%) round out the next three positions (read: Is This a Better Europe ETF? ).
The ultra-low interest rates prevailing in these regions with no possibility of a rise in rates down the line, unlike the U.S., might compel some investors to look for dividend yields instead. And for that group of yield-hungry investors, EFV is one of the best suited options. EFV’s 30-day SEC yield stands at 3.99% (as of March 31, 2014).
The fund has low concentration risk from an individual securities perspective, as it puts only 19.45% of share in the top 10 holdings. HSBC Holdings Plc (2.89%), BP Plc (2.28%) and Total SA (2.14%) are the three top elements in the basket. The ETF focuses mostly on the financial sector with two-fifth of assets invested in it. The product charges investors 40 basis points a year in fees, which is lower than most comparable ETFs.
EFV presently carries a Zacks ETF Rank # 2 (Buy). The fund was up about 3% in the last week.