The investment environment since the financial crisis of 2008-09 has been relatively volatile, and there is an increasing need for active portfolio management. With easy money swiftly flowing from one asset class to another, investors need to keep a close eye on economic developments and developments that can trigger positive or negative action for specific asset classes.
With that in mind, here are two ETFs that should be considered for the next three to six months.
Vanguard Intermediate-Term Corporate Bond ETF (VCIT, Financial)
The Vanguard Intermediate-Term Corporate Bond ETF provides exposure to investment grade corporate bonds and has a current SEC yield of 3.2%. As of Feb. 29, the ETF had 52.8% exposure to Baa-rated bonds and 38.6% exposure to A-rated bonds. With an attractive expense ratio of 0.1%, the fund should be considered in the current economic environment. The reasons for being bullish on this ETF are as follows:
- The GDPNow indicator for the Federal Reserve Bank of Atlanta shows that U.S. GDP growth is likely to grow at only 0.1% for the first quarter. If this holds true, there is likely to be a flow of money from risky asset classes to relatively risk-free asset classes. In such a scenario, I see bullish momentum for VCIT.
- The EU28 economic sentiment indicator shows that the economic sentiments are at the worst level in the last 12 months. Again, this is an indicator of economic weakness and will translate into “risk off” trade that is likely to be positive for investment grade bonds. In my opinion, investment grade bonds are a better investment option than medium-term government bonds.
- Third, China’s manufacturing and nonmanufacturing PMI might have witnessed some recovery in March, but the sustainability of recovery is still in question. All major economies or regions are in slowdown, and it would be a good idea to consider exposure to investment grade bonds in such a scenario.
iShares Global Energy ETF (IXC, Financial)
The iShares Global Energy ETF provides exposure to energy stocks from around the world. With an expense ratio of 0.48% and 30-day SEC yield of 3.72%, the ETF is worth considering for the foreseeable future.
Readers might question why I am recommending an energy ETF when I am also talking about a global slowdown. Here are the reasons:
- The major oil producers (OPEC and Russia) will be meeting on April 17 to discuss potential production freeze, and a positive outcome seems likely. Oil-producing countries have been suffering, and the best way forward would be to freeze production. That seems likely to happen soon. This will trigger upside for oil, which should be trading at $45 to $50 per barrel if the outcome of the meeting is positive.
- While economic weakness in the U.S. is a concern, it also implies that the dollar is likely to trend lower in the foreseeable future. The dollar index has weakened recently, and this is likely to be positive for all hard assets (including oil). If the Fed proposes further expansionary monetary policies, oil can witness more upside just backed by the lower dollar factor.
Conclusion
These two ETFs are likely to generate good returns for investors in the next three to six months; besides considering exposure to these ETFs, investors also need to increase allocation to cash and gold for the coming months.
While it’s too early to conclude that there will be a recession in 2016, investors need to remain cautiously optimistic and closely watch economic data for the U.S. and other major economies.
Disclosure: No positions in the ETFs.
