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Negative ETF Ranking - 2013
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9
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-1.37% - shares International Treasury Bond ETF (IGOV)
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10
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-1.83% - iShares S&P GSCI Commodity-Indexed Trust (GSG)
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11
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-1.98% - iShares Core Total Aggregate U.S. Bond ETF (AGG)
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12
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-2.00% - iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD)
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13
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-3.44% - iShares National AMT-Free Muni Bond ETF (MUB)
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14
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-3.64% - iShares MSCI Emerging Markets ETF (EEM)
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15
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-6.09% - iShares 7-10 Year Treasury Bond ETF (IEF)
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16
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-6.73% - iShares Emerging Markets Local Currency Bond ETF (LEMB)
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17
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-28.33% - SPDR Gold Shares Trust (GLD)
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Shockingly, not every asset class went up last year. I say shocking because usually when stocks
are hot nobody really cares what anything else is doing.
Last post I covered the ETFs that finished in the black last
year and what we should expect moving forward.
This time I will cover the ETFs that finished in the red in 2013 (with
the help of this
file). Again, when looking forward I
am using this thesis:
Growth should accelerate and, despite the “taper”, given the benign inflation outlook the Fed should stay accommodative, which would provide a good tailwind to stocks along with a reduction in systemic risk. Still relative valuations in the US, particularly small caps, are now higher and at or slightly above their near-term average and the prospect of rising interest rates could pose a threat. On a relative value basis, international markets look attractive where developed market growth should also pick up and while emerging markets face secular headwinds they do appear cheap. The aforementioned backdrop should cause long quality US interest rates to rise and strengthen the dollar; however, other countries could embark on programs to bring long rates down.
I will again mention the caveat that what I attempt to do is
make assumptions (i.e. NOT a price target) based on a more global thesis like
the aforementioned and when things change portfolio and thesis adjustments will
be made accordingly…
And now, the ETFs that had negative returns in 2013…
- IGOV – 2013: International treasuries almost finished positive, but alas they finished with every other fixed income asset class. They did finish the second half of the year very strong with the help of a weaker dollar. Moving Forward: While the US is pulling in the reins on QE – pushing our yields higher and bond prices lower – other countries are expected to remain easy or possibly become more accommodative (see Japan’s “success” with their own QE). This would push their yields lower (or stable) and prices higher, but also cause their currencies to fall and thus washing out any positive. Thus, an investment that is USD hedged could provide some boost.
- GSG – 2013: The commodity chart looked a lot like USO last year, but worse as it includes agriculture and precious metals. Commodities look to be in a range, and while that’s subjective the alternating black (Q1, Q3) then red quarters (Q2, Q4) would appear to validate that. Moving Forward: see USO (note: energy and industrial metals make up the bulk of index).
- AGG – 2013: The pulse of the US bond market had its first negative calendar year return since inception and didn’t break its intermediate-term trend for the last eight months of the year. Interestingly though it only had one negative quarter (Q2). Moving Forward: Assuming interest rates to continue to rise in 2014 it should yield another negative year for bonds. While it appears interest rates may have hit a secular bottom in 2012, it’s important to remember that bonds hedge against a decline in risky assets (note: this has held as of late with equity markets off their highs and AGG moving up) and that they present much less risk (unless they are high yield or high duration) in terms of large capital loss. Finding a balance between rising rates and the portfolio hedging benefits fixed income brings should be the goal.
- LQD – 2013: See AGG, though the Investment Grade Corporate Bond LQD did break its intermediate-term downtrend at the end of the year. Moving Forward: See AGG. There doesn’t appear to be much room for investment grade spreads to compress any further, so outside a 2008 credit event I would think they will have a high correlation with Treasuries.
- MUB – 2013: Munis were hit harder than their taxable counter parts in 2013 with Detroit’s bankruptcy taking center stage. While they did recover in the later part of the year, MUB like AGG finished the year below its intermediate-term trend for the last eight months. Moving Forward: Quick math, 3% yield on MUB equates to a tax effective yield at the 40% bracket of 5.00%. AGG has a yield of 2.32%. So if you are in a higher tax bracket, pick out some attractive munis, ladder them by maturity, hold to maturity, and you get a decent yield with not much interest risk. Note: as interest rates rise prices do fall, so prepare to watch your values drop, but if you hold to maturity you get the face value back.
- EEM – 2013: While EEM finished with two positive quarters and the last three months above the intermediate-term trend (barely), it still couldn’t overcome a poor start to the year as money moved out of Emerging Markets when our interest rates moved up. EEM is also over 60% below its 2008 peak. Moving Forward: Even more so than developed markets, emerging markets appear to have an attractive relative valuation to our market. Much of this is likely due to some longer-term demographic and geo-political issues and is especially true of the ones that got beat up last year (Russia, China). Further, a sharp rise in US interest rates could continue the capital flow out of emerging markets. Thus, while there are opportunities for upside until the trend reverses it’s hard to have much conviction.
- IEF – 2013: See AGG. Moving Forward: See AGG, though I think it makes sense to take a more tactical (over and under weighting when the market dictates) approach to the 7 – 10 year Treasury space.
- LEMB – 2013: See EEM; rising domestics rates equates to capital moving from emerging markets local currency bonds back into US markets. Moving Forward: See EEM and IGOV. While rising domestic rates would continue to be negative for emerging market bonds, a USD hedged exposure could be a nice boost.
- GLD – 2013: The gold chart for the year went pretty much straight down. You can take your pick why: higher interest rates, decrease in systemic risk probability, lower inflation. But at the end of the day you see three out four negative quarters, the whole year below the intermediate term trend, and down nearly 30%. Moving Forward: All three items I listed for gold’s 2013 decline are still in place. Maybe one of those reverses and this turns into a great contrarian trade, but until the trend changes it’s difficult to allocate dollars to gold.
The views and opinions
expressed herein are those of the author(s) noted and may or may not represent
the views of Capital Analysts, Inc. or Lincoln Investment. The material presented is provided for informational
purposes only. Nothing contained herein should be construed as a recommendation
to buy or sell any securities. As with all investments, past performance is no
guarantee of future results. No person or system can predict the market. All
investments are subject to risk, including the risk of principal loss.
