There are several important indicators that currently point to sluggish economic growth in the first two months of 2016 and economic growth can remain sluggish in the foreseeable future. In such a scenario, investors need to adjust the portfolio with changing allocation to different asset classes, geographies or stocks.
Three ETFs are worth considering at current levels and are interesting for holding through 2016.
The Vanguard long-Term Corporate Bond ETF (VCLT, Financial) is my first choice among ETFs that are interesting. The ETF provides exposure to quality (investment grade) long-term corporate bonds. As of January, the ETF had 43.3% exposure to “A” rated bonds and 48.1% exposure to “Baa” rated bonds.
With $6.7 trillion worth of sovereign bonds trading at negative yields, investors will seek increasing exposure to corporate bonds. Further, with $10 trillion in expected deficits for the U.S. in the next 10 years, the Treasury bonds are unattractive from a long-term perspective.
The Vanguard Corporate Bond ETF has SEC yield of 4.89% and has a low expense ratio of 0.1%. I am bullish on the ETF for 2016 and also for the next three to five years.
iShares MSCI Emerging Markets ETF (EEM, Financial) is another interesting ETF that can be considered for 2016 and for the long term. In the last 15 years, emerging market share of global GDP has increased while the share of U.S. and Europe has declined.
Even for the next decade, emerging markets will outperform developed markets in terms of GDP growth as well as equity performance. Emerging markets have been depressed recently, and this is an opportunity to consider exposure to these markets for the long term.
In the next decade, India is likely be the best-performing market in terms of GDP growth and equity returns. Therefore, investors can also consider an ETF that provides exclusive exposure to Indian equities.
DB Commodity Index Tracking Fund (DBC, Financial) is another ETF worth considering for 2016 and beyond. The last few quarters have been disastrous for industrial commodities as well as for energy. With sentiments still depressed, this is a good opportunity to consider exposure to a beaten-down sector that provides immense long-term value.
Further, it is important to note that the DB Commodity Index Tracking Fund also provides exposure to agricultural commodities and I am bullish on this theme for the long term. As of March 4, the ETF had 6.88% exposure to sugar, 6.42% exposure to soybeans, 5.75% exposure to wheat and 5.98% exposure to corn among others.
With uncertain economic conditions, it is important to remain diversified, and it’s also important to keep buying oversold sectors. With global expansionary monetary policies likely to continue, I expect all risky assets to trend higher in the long term.
Disclosure: Exposure to Indian equities.
