Commodities strode on to the stock market stage in the first quarter and settled more comfortably into their lead portfolio role in the past month.
Oil and precious metals — and the stocks tied to them — continued to gush and flash in the past month, warming ETF investors’ hearts.
The broad U.S. stock market advanced modestly, with gains in the commodity-backed materials and energy sectors offsetting losses in the technology sector.
Still, uncertainty about interest rates and global growth kept investors on edge.
The odds of a June interest rate hike fell in early May after a dovish statement from Federal Reserve policymakers. Tepid data on jobs growth followed, reinforcing views that the path to tightening in the U.S. was likely to remain gradual.
Some very big corporate hits and misses added to the queasy mood.
Amazon (AMZN) soared after it crushed quarterly earnings estimates. The stock hit a new 52-week high Thursday.
However, Apple (AAPL) sank after its underwhelming results. The stock struck a nearly two-year low Thursday.
Given those cross-currents, investors are left feeling grateful for any gains at all, but less than wowed.
SPDR S&P 500 (SPY), a proxy for the broad U.S. market, added 0.3% in the past month.
IShares MSCI EAFE (EFA), investing in international developed markets, rose 0.4% over the same period.
Vanguard FTSE Emerging Markets (VWO) gave up 4.0%.
At BlackRock, the world’s largest asset manager, strategists favor the outlook for U.S. equities over most world peers over a three-month horizon. However, they see “peak margins and payout ratios limiting returns.”
Investing professionals are braced for low-key stock market performance looking forward, too. Two top money managers tell IBD that it is more important than ever to be alert for opportunities in challenging times.
Kevin Guth, partner and managing director, Snowden Lane Partners in New Haven, Conn.; roughly $835 million in assets under advisement:
We expect the low-growth environment to continue in the U.S. and choppy markets worldwide. However, we’re seeing signals of growth from the weakest areas of the market over the past year, including international markets and commodities. We expect a shift in the markets to occur in these areas and provide opportunity for growth. Investors should be targeted and tactical in this market, and we favor exchange traded funds because of their diversification and focus on specific industries and markets.
- IShares Europe (IEV) focuses on blue-chip European stocks, which have been in a downtrend for more than two years and should lead Europe when their markets gain strength.
We began to track strength in foreign banks and noticed a recovery in this area of the market over the past three months. I believe the first sign for growth to return to international markets will come from the financial sector gaining strength. IEV is the type of ETF that will attract capital first as the international markets recover. (Editor’s note: IEV allocates 18% of assets to financial services — its largest sector weighting.)
- IShares U.S. Basic Materials (IYM) focuses on high-quality companies in the materials sector. DuPont (DD) and Dow Chemical (DOW) are the dominant players in this area and constitute the top two holdings of this ETF.
Weak emerging markets and commodities have been an integral part of the market’s weakness over the past year. In order for global growth to recover, the materials markets must firm up. IYM is the type of investment that will lead the market in recovery and, due to the recent weakness, could have limited downside risk.
- First Trust Dow Jones Internet (FDN) targets specific technology companies with international growth potential.
Growth can still be found in the technology sector. The problem has always been that if you pick the wrong companies at the wrong time, your investments will struggle. Companies like Facebook (FB) and Amazon are changing the lives of billions of people and have unlimited potential as their international businesses gain strength. But the idea of timing any sector and perfectly selecting your investments is very difficult.
FDN, which holds a basket of stocks in an ETF wrapper, will give you exposure to this fast-growing industry while reducing single-company risk.
Janet Brown, president of FundX Investment Group in San Francisco; $850 million in assets under management:
Funds with strong recent returns tend to continue to do well for the next few months or even years (academics call this “persistence of performance”). Our picks include a dividend, low volatility, and mid-cap value ETF.
- PowerShares High Yield Equity Dividend Achievers Portfolio (PEY) tracks the Nasdaq U.S. Dividend Achievers 50 index, which has historically been more volatile than the relatively placid Dow Jones U.S. Select Dividend index. Given this added risk, PEY has outpaced more tame competitors such as iShares Select Dividend (DVY).
Like other dividend-oriented ETFs, PEY offers significantly greater income than a 10-year U.S. Treasury, with the added appreciation potential of a diversified stock portfolio.
- PowerShares S&P 500 Low Volatility Portfolio (SPLV) invests in the S&P 500 stocks that have been the least volatile for the trailing 12 months, and SPLV has done better than the S&P 500 for most of this year. Given the high volatility and lackluster performance of stocks over the past year, it’s not surprising that investors have flocked to less volatile companies. SPLV is up 6.3% year to date through May 11 vs. 1.8% for SPDR S&P 500.
- IShares S&P Mid-Cap 400 Value (IJJ) has a broadly diversified portfolio of midcap stocks, none of which are in the S&P 500 index. This year, the large-cap growth trend weakened, and small- and midcap value stocks had stronger returns.
Relative to the broad S&P 400 index, IJJ invests in companies that have a relatively low price-to-earnings ratio and price-to-book ratio. IJJ is an emerging leader today with a history of strong performance when value strategies have thrived.
We own all three and would buy these ETFs today — but we can’t know in advance how long these ETFs will continue to deliver strong returns. We monitor our positions monthly, and if performance falters, we’ll move on to new leaders.