Last week saw the end of a year that was relatively kind to investor portfolios, as most major asset classes managed to post strong results in 2010. As the calendars flip to 2011, the outlook remains uncertain; lingering obstacles in the form of high unemployment and bloated debt loads certainly pose problems, but rapidly-expanding emerging markets and resurgent corporate earnings provide reason to be optimistic.
As investors review their performance over the last year and look forward for opportunities in the year to come, we offer up 11 high level thoughts on intriguing ETF investments for 2011 [for more ETF insights, sign up for our free ETF newsletter]:
1. PowerShares Listed Private Equity (PSP)
After a relatively meager IPO year in 2010, many on Wall Street are predicting that 2011 could see the return of $1 billion-plus initial public offerings. “In 2011, we will see some very large multibillion-dollar IPOs,” says Mark Hantho, global co-head of equity capital markets at Deutsche Bank. Obviously, some are already on file, but there will be more to come from private-equity firms that have large holdings they are more likely to exit through the public markets.”
If that prediction comes to fruition, 2011 could be a good year for private equity firms that are able to cash out of positions that became illiquid during the recent downturn or to take profits on companies bought at a discount during the depth of the recession. PSP offers exposure to a global portfolio of publicly-traded private equity firms, and the fund is coming off of a strong 2010 that saw gains of close to 25%.
2. SPDR S&P Oil & Gas Exploration & Production (XOP)
The last few months of 2010 gave a huge boost to the energy sector, as crude prices eclipsed $90 and open the new year poised to make a run at $100. And according to a recent survey by Barclays, the oil industry seems comfortable that current prices are sustainable. In an effort to increase their reserves, Big Oil is planning a considerable increase in capital expenditures in 2011. ”
The global oil industry—far from chastened by the catastrophic U.S. Gulf of Mexico spill—is planning record spending next year, including a large amount for deep-water development,” writes Russell Gold. “From giants Saudi Aramco and Exxon Mobil Corp. to five-person wildcat outfits, the industry plans to spend nearly a half-trillion dollars next year to find and extract oil and natural gas.”
Increased spending could be a positive development for XOP, which includes firms that provide exploration and production-related services to the energy industry [see XOP holdings].
3. Global X China Financials ETF (CHIX)
The last week or so has been a quiet period for investors, as a lack of meaningful earnings reports or data releases has given stocks little direction in the final days of 2010. Appropriately enough, the biggest development came from China, where an interest rate hike on Christmas day sparked worries the Beijing was taking steps to reel in the red hot Chinese economy. If Beijing continues to “tap the brakes” in 2011, it could be a negative development for not only the Chinese market, but for industries around the world that have benefited from surging Chinese demand in recent years.
“But at least one sector, Chinese banks, can look forward to better earnings after a prolonged low-rate environment that’s put downward pressure on net interest margins,” writes Isabella Steger. JP Morgan indicated recently in a note that even minor interest rate changes could translate into material increases in profitability for Chinese financial institutions, many of which are now among the largest banks in the world. CHIX offers exposure to China’s financial sector, investing in stocks of about 20 different banks [see CHIM holdings].
4. iShares COMEX Gold Trust (IAU)
Gold’s run-up to new highs during 2010 has done little to thin the crown of big investors with a bullish outlook for precious metals. Goldman Sachs expects gold to reach $1,690 an ounce in 2011, while analysts at UBS are calling for gold to average $1,550 in 2011 before pulling back in 2012. Gold is currently trading at about $1,400 an ounce. “Gold bulls say the price of the precious metal is set to reach fresh highs early in the new year, on mounting inflation fears fueled by loose U.S. and euro-zone monetary policies,” writes Rhiannon Hoyle.
With concerns about inflation in China beginning to accelerate, lingering concerns about the health of economies in the U.S. and western Europe, and the impact of the recent stimulus plan yet to be determined, there is no shortage of potential drivers of a continued gold rally. Moreover, the Federal Reserve hasn’t ruled out additional stimulus measures, and gold’s appeal as an alternative currency could give it a boost if the dollar stumbles [see list of all gold ETFs or just physical gold ETFs]
5. ProShares UltraShort Euro (EUO)
The last year has taken a toll on the euro zone currency, as an ongoing sovereign debt saga sent the currency lower in 2010 against most of its major rivals [see Worst Performing ETFs of 2010]. And there is a case to be made that the trouble for the euro has only begun. The bailouts of Greece and Ireland were relatively small in scope, especially compared to what would be required to save the cash-strapped economies of Spain and Italy–two markets many believe are destined to need assistance in the next year. One thinktank recently warned that there is an 80% chance of losing the single currency over the next decade–a development that is no doubt becoming increasingly attractive to German taxpayers.
EUO is a leveraged product that seeks to deliver daily results equal to -200% of the daily performance of the U.S. dollar price of the euro, and as such might not be appropriate for everyone. But for those who think the euro faces a tough road ahead in 2011 and have the ability to monitor and potentially rebalance a position, EUO might be worth a closer look.
6. Market Vectors High Yield Municipal Bond ETF (HYD)
With interest rates hovering near record lows and widely expected to remain depressed for much of 2011, a fixed income yield north of 9% sounds too good to be true. But for investors in the higher tax brackets, that’s exactly what HYD offers; the tax equivalent 30 day SEC yield for someone in the 35% bracket comes in at about 9.4%. Even for those in the 25% range, the tax equivalent yield of 8.2% sounds pretty good.
Municipal bonds have been in freefall for much of the last month, thanks to a combination of deteriorating fundamentals and the expiration of the Build America Bond program, which resulted in expectations for a flooding of muni bond markets (and more competitive rates) next year. That has created some interesting opportunities for yield hungry investors–especially those with the stomach for a little bit of risk.
HYD is certainly risky–the underlying asset consists primarily of non-investment grade municipal bonds–but the potential reward if default rates don’t spike is considerable.
7. India Infrastructure Index Fund (INXX)
India is one of the world’s most populous nations and home to one of the most promising economies. But there remain some significant hurdles to unlocking the tremendous economic potential of a swelling middle class, and the country’s outdated infrastructure has long been a restraint on growth. “There’s a lot of talk among those in power in India about how the Internet super-highway will speed them to prosperity,” said the legendary Jim Rogers after a visit. “Meanwhile, endless traffic jams and a deteriorating national highway system kept us creeping along at a snail’s pace as my wife and I traveled through countryside. Goods-carrying trucks can only average about 10 miles an hour crossing the country and often can be held up for days by the bureaucracy just trying to cross state lines.” According to the World Economic Forum’s Global Competitiveness Index, India is ranked 91 out of 139 nations for quality of infrastructure, behind Indonesia and Ethiopia.
India is well aware of its infrastructure deficiency, and is in the midst of an aggressive plan to upgrade its system of roads and rail. The government expects investments in infrastructure projects to reach $500 billion in the five years ending March 2010, and the government of Prime Minister Manmohan Singh plans to boost that figure to $1 trillion in the following five years.
India’s infrastructure plans makes INXX appealing; the fund from EGShares offers exposure to construction firms, engineering companies, and telecom providers, among other components of India’s infrastructure industry [see INXX holdings].
8. Technology SPDR (XLK)
The tech sector wasn’t among the stars of 2010, the the next 12 months could see prospects for many technology firms increase. Companies have been putting off upgrades to their technology infrastructure for several years, preferring to hoard cash in case an emergency. But with economic prospects improving and the likelihood of a double dip now significantly diminished, many analysts believe that 2011 will see corporations loosen the pursestrings. There have been false alarms of a “tech refresh cycle” in the past, but it seems likely that 2011 will see increased demand not only for consumer products, but business-related technology items as well. “From Apple’s iPad to cloud computing, hot investment themes abounded in tech in 2010,” writes Rex Crum. “And even as the rest of the economy struggles to get back on its feet, the sector is likely to see more expansive growth in the coming year thanks to the relative strength of company balance sheets, strong consumer interest and ongoing demand for technology to drive efficiency gains in business.”
XLK was recently trading at a forward P/E of under 15 times, a surprisingly low valuation for a corner of the market that is expected to deliver strong growth in coming years (the 3-5 year EPS growth comes in north of 12%).
9. Market Vector Rare Earth/Strategic Metals ETF (REMX)
China’s policies over export of a group of metals critical to a variety of industries has drawn increased scrutiny in recent months, but Beijing has continued to press ahead with restrictions on rare earth metals in recent days. The Ministry of Commerce said recently that it would cut its quota on exports of rare earth metals by 35% in the first half of 2011, after slashing the quota by more than 70% for the second half of 2010.
China supplies close to 95% of the world’s rare earth metals, a group of resources used in everything from mobile phones to high tech weapons. If the country continues to play hardball and moves ahead with plans to discourage export of rare earth metals, a spike in prices could ripple throughout the global economy. REMX is linked to an index consisting of companies engaged in a variety of activities that are related to the producing, refining and recycling of rare earth and strategic metals and minerals. If the Chinese supply dries up, demand for the services of these companies could skyrocket [see REMX fact sheet].
10. iShares MSCI Israel Index Fund (EIS)
When rattling off a list of major exporters of natural gas, most investors are likely to start with Russia and follow up with a string of oil-rich Middle East states. Israel likely wouldn’t be mentioned, but a major discovery could change the country’s energy equation in coming years. Noble Energy recently announced the discovery of a massive gas field off the coast of Israel; the field contains 16 trillion cubic feet of natural gas, making it one of the largest discoveries of the last ten years. “It’s still early days, and getting all that gas out of the seabed may be more difficult than it seems today,” writes Charles Levinson. “But Noble and its partners think the field could hold enough gas to transform Israel, a country precariously dependent on others for energy, into a net-energy exporter.”
EIS, which offers exposure to Israel’s equity market, is light on exposure to the energy sector; healthcare, financials, and telecom dominate the asset base. But the newfound gas wealth–assuming that it can be tapped–could give a lift to the entire economy.
11. WisdomTree Dreyfus Emerging Currency Fund (CEW)
All things considered, the U.S dollar has held up relatively well in 2010. Ongoing weakness in the euro zone and concerted efforts by the Japanese government to weaken the yen helped to hold up the greenback despite concerns about the strength of the U.S. economy and increased interest in international equities. And while the dollar may hold its ground against its major rivals once again in 2011, all signs seem to point to a decline compared to currencies of emerging markets. Money continues to flow into stocks of emerging markets at an impressive pace, thanks to strong growth prospects.
Perhaps more importantly, interest rates are unlikely to climb at any time soon; recent settling prices for Fed-funds futures priced in a 68% chance for the FOMC to raise rates in December 2011, down from a 96% chance in recent sessions. As China’s recent rate hike illustrated, many emerging markets are being forced to raise rates in an effort to cool down rapidly-accelerating economy. A quick glance at money market rates around the world shows a huge discrepancy between the U.S. and developing economies.
CEW offers exposure to a basket of emerging market currencies, including the Mexican Peso, Brazilian Real, Chilean Peso, South African Rand, Polish Zloty, Israeli Shekel, Turkish New Lira, Chinese Yuan, South Korean Won, Taiwanese Dollar, and Indian Rupee. In addition to reflecting appreciations in these currencies relative to the greenback, CEW seeks to deliver money market rates available in these economies–which are considerably higher than comparable yields in the developed world.
Disclosure: No positions at time of writing.