I don't usually get into forecasting markets, but when CNBC asked me on to give five ETF picks for 2013, I couldn't resist.
For the most part, I am one of the most boring investors I know. My core portfolio is completely indexed, built around the concepts of massive diversification and extraordinarily low costs.
It's similar—although not identical—to the World's Cheapest ETF Portfolio, which offers exposure to global equities, bonds and commodities for a blended expense ratio of less than 10 basis points per year, or $10 for every $10,000 invested.
But like many core investors, I reserve a small portion of my portfolio—up to 10 percent—for speculation. I sometimes invest this in single stocks, and sometimes in ETFs. I often sit on cash when I have no good ideas.
But my appearance on CNBC got me thinking: Where should investors put new money to work in 2013? I came up with five ideas, and in the end, invested in one. Here they are:
1) WisdomTree Japan Hedged Equity ETF (NYSEArca: DXJ)
AUM: $1.22 Billion
Expense Ratio: 0.48 Percent
This one is easy. Shinzo Abe and the new leadership in Japan are committed to printing "unlimited quantities" of yen to drive down the currency and try to end Japan's deflationary spiral. While other Japanese administrations have promised aggressive quantitative easing in the past, the language and level of commitment associated with this push seems qualitatively different. The Wall Street Journal and others have called "short yen" the "trade of the year" among hedge funds.
A falling yen will boost Japanese exporters and should spark a run-up in risk assets, including stocks. The problem with buying a traditional Japanese equity ETF like the iShares MSCI Japan ETF (NYSEArca: EWJ) is that any increase in equity prices could be offset by the impact of a falling currency. DXJ hedges out that currency exposure, leaving you with pure exposure to domestic equity prices. It even goes one step further, using a weighting system that emphasizes exporters, who stand to benefit from the falling yen.
I'm not alone in liking DXJ: It pulled in $505 million in new assets in December alone, and has beaten the pants off of EWJ over the past month.
2) Market Vectors Emerging Markets Local Currency Bond ETF (NYSEArca: EMLC)
AUM: $1.21 Billion
Expense Ratio: 0.47 Percent
Like DXJ, this one seems a bit of a no-brainer. Compared with developed-markets debt, EMLC and other emerging-market-debt ETFs give you exposure to better balance sheets, higher growth and better yields. EMLC has a 30-day SEC yield of 4.80 percent, compared with just 1.61 percent for the iShares Core Total U.S. Bond Market ETF (NYSEArca: AGG). When you combine that with the fact that most investors have zero or near-zero exposure to international debt, EMLC seems like a strong candidate.
What's holding it back? The fund has underperformed lately compared to dollar-denominated emerging market debt because the dollar has been on a tear. The debate between funds like EMLC and dollar-denominated products is legitimate. But personally, I'll take on the currency risk for the added diversification benefit.
3) iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG)
AUM: $266.5 Million
Expense Ratio: 0.18 Percent
This isn't so much a market call as an ETF-specific call.
I'm a huge fan of the new iShares Core ETFs, as they offer solid exposure with ultra-low costs from a reputable issuer. I'm including IEMG in this "Top 5" list primarily for the benefit of investors who hold the iShares MSCI Emerging Markets Fund (NYSEArca: EEM).
Everyone and their mother have written about how IEMG is a better deal for the long-term investor than EEM, because it has an annual expense ratio of 0.18 percent compared to 0.67 percent for the old-school EEM. That's nice, but to me what matters is coverage: Unlike EEM, IEMG includes exposure to small-cap stocks in the emerging markets—the most exciting segment of that market and also the one with the lowest correlation to domestic stocks.
4) SPDR China ETF (NYSEArca: GXC)
AUM: $1.11 Billion
Expense Ratio: 0.59 Percent
Since we're talking emerging markets, let's talk about China. China's equity markets have been absolutely hammered over the past few years, and now look cheap. GXC is one of our favorite China ETFs; and it's vastly superior to the far-more-popular iShares FTSE China Large-Cap ETF (NYSEArca: FXI). The fund trades with a backward-looking price/earnings ratio of 11, and a forward-looking P/E below 10. With the new Chinese leadership pushing for increased foreign investment and stronger economic growth, China's woes could be behind it.
I wouldn't feel too strongly about this if I didn't think most investors were structurally underweight China in their portfolios. Due to free-float restrictions, China remains a bit player in global indexes. Even though it has the world's second-largest economy, it is only the ninth-largest country in most global indexes, trailing countries with smaller economies like France and Canada. Maybe you think France's future is more important to the global economy than China's, but I'm not so sure.
(Another solid option here is the iShares MSCI China Fund (NYSEArca: MCHI).
5) Global X Superdividend ETF (NYSEArca: SDIV)
AUM: $197.2 Million
Expense Ratio: 0.58 Percent
I often get accused of disliking any ETF that smacks of marketing-speak. And nothing smacks of marketing speak quite like the Global X SuperDividend ETF (NYSEArca: SDIV). Superdividends? It's like this ETF was designed for me to ridicule it.
And yet, I like it. The fund takes the 100-largest-dividend-paying companies in the world, adjusts slightly for dividend sustainability and pays an 8-plus percent yield. If you're looking for equity income, you could do worse.
The majority of assets invested in dividend-weighted ETFs is invested in domestic funds. But there are no domestic high-yield equity ETFs paying out more than 5 percent these days. Moreover, with the hangover from 2013's dividend accelerations in the United States, I wonder if even the current levels will stick.
Go international and you avoid any 2013 hangover and pick up substantially higher yields. The fund has a low beta to the market, reasonable liquidity and could be a nice fit in a portfolio.
So there you go: Five ideas. There were others that almost made the list: including the Pimco Total Return ETF (NYSEArca: BOND), the iShares MSCI Turkey Fund (NYSEArca: TUR), the PowerShares Fundamental High Yield Corporate Bond Portfolio (NYSEArca: PHB), among others.
But CNBC doesn't give you much time, so I had to cut it to five.
Even that may be too many: After all, I only own one of these ETFs, DXJ—the currency-hedged Japan ETF. So take the others with a grain of salt. In fact, take DXJ with a grain of salt too.
To state the obvious, there's a reason I index the vast majority of my portfolio. You probably should too.
Contact Matt Hougan at [email protected]
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