Five Compelling Long Term Trends (And ETFs To Play Them)

by on January 23, 2012 | ETFs Mentioned:

Over the last several years ETFs have become popular tools for active investors seeking to take advantage of short-term mispricings in the market; the average daily trading volumes on many of the most popular-exchange-traded products clearly indicates that ETFs are widely used by day traders who measure their holding periods in minutes rather than years. Of course, ETFs also continue to be tremendously powerful tools for the set of the market for which they were originally designed: long-term, buy-and-hold investors. For those in it for the long haul, ETFs can represent a way to tap into a compelling investment thesis that is expected to play out over the course of several years or even decades, without conducting company-specific research or taking on considerable company-specific risk [see also 12 High-Yielding Commodities For 2012]. 

Below, we outline five long-term trends that are expected to play out over the next several decades. While each of these investments could experience some short-term volatility, they are uniquely positioned to thrive if the related long-term trends unfold as expected [for more ETF insights, sign up for the free ETFdb newsletter]: 

1. India Is Urbanizing (And The Middle Class Is Growing)

Trend: Like many other emerging markets, India is experiencing a significant demographic shift. The Indian population is moving from rural areas into cities at a breakneck pace. Currently only about 31% of India’s population lives in urban areas, but that figure is expected to climb to 40% by 2030. That translates into an additional 225 million urban residents over the next 20 years or so.

The ramifications of this urbanization are important; as Indians flock to cities, many are taking on better-paying jobs, joining the middle class, and, for the first time, possessing discretionary income. That swelling middle class is causing demand for items such as cars, televisions, and other discretionary goods to skyrocket, and this corner of the market should continue to expand for the foreseeable future [see also Evaluating India ETFs: Three Important Factors To Consider]. 

ETF Idea: There are a number of India ETFs on the market (as well as an India ETN), but perhaps the most appealing way to tap into this trend is the India Consumer ETF (INCO). This ETF holds 30 of the largest consumer companies in India, including manufacturers of personal products, carmakers, entertainment companies, clothing companies, hotel chains, and tobacco stocks. In other words, INCO’s portfolio consists of the companies that are positioned to profit from increasing discretionary spending and a growing India middle class. 

2. Baby Boomers Are Retiring

Trend: The youngest of the baby boomers are now reaching their upper-60s, and over the next two decades many of the 79 million Americans born between 1946 and 1964 will retire. This trend will obviously impact the U.S. labor market, as a significant portion of the labor force will leave their jobs and create openings for a younger generation. This trend will also have a major impact on health care costs in the U.S.; an aging population means greater needs for various health care goods and services. Beyond the various legal and policy initiatives, this has the potential to result in a meaningful increase in profitable customers for the health care sector [see also Pitfalls In Target Retirement Date ETFs]. 

ETF Idea: Many of the ETFs in the Health Care & Biotech ETFdb Category are positioned to profit from increased health care spending by an aging population over the next 20 years or so. The Vanguard Health Care ETF (VHT) is one appealing option; this ETF has a deep and balanced portfolio (almost 300 individual names), and an expense ratio of just 0.19%.  

3. Russia’s Population Is Declining

Trend: As mentioned above, the demographic trends playing out in India are extremely favorable. Unfortunately, the same can’t be said about another major emerging market; Russia is experiencing a significant population decline that could weigh on the economy for years to come. Russia’s population has declined by about 2.3 million over the last decade, with the average age climbing from 37 to 39 during that period. The number of married couples also fell, while divorce rates increased. 

A declining population is troublesome from an economic perspective; Russia’s workforce is aging, which creates challenges to fill open positions and attract international investments. And fewer people obviously means declines in revenue for a wide range of companies [see also Are Russia ETFs A Buy?]. 

ETF Idea: One way to play this trend is to minimize exposure to Russia within long-term portfolios. An interesting ETF option in that regard is the First Trust BICK Index Fund (BICK)–a twist on the well-known BRIC bloc of economies that replaces Russia with South Korea. The population there is growing at a very slow rate, but is definitely in positive territory. Using BICK as a primary source of emerging markets exposure allows investors to avoid Russia’s demographic quagmire, and could be a way to focus on more promising markets. 

4. Natural Gas “Market Share” Is Increasing

Trend: With each new discovery, it seems increasingly likely that natural gas is the best option for replacing crude oil in the domestic energy equation. The last several years have seen a number of massive discoveries of the fuel within U.S. borders, meaning that natural gas is abundant, cheap, and clean. Natural gas is now expected to be the fastest growing fossil fuel globally between now and 2030. Natural gas use in emerging markets could be much higher; BP estimates that Chinese demand will grow at an annual rate of more than 7.5%. Crude oil isn’t going away, but the market share of natural gas is undeniably on the rise [see also 25 Ways To Invest In Natural Gas]. 

ETF Idea: There are a number of natural gas ETPs on the market, but the futures-based strategies employed by these products makes them difficult to use in a long-term portfolio. The First Trust ISE Revere Natural Gas Index Fund (FCG), on the other hand, represent a unique way to bet on increased demand for natural gas; this ETF holds stocks of companies engaged in the natural gas industry, including exploration and extraction. So FCG allows investors to target assets that are positioned to benefit from a growing natural gas market without experiencing the nuances of a futures-based strategy. 

5. Chinese Yuan Is Appreciating

Trend: The value of the Chinese yuan has been a contentious subject for several years, with the international community gradually stepping up pressure on Beijing to allow its currency to fluctuate. Though progress on the issue has been painfully slow, China seems to now be moving forward with plans to allow the yuan to gradually appreciate against the U.S. dollar. Though any appreciation will be moderate, it seems inevitable that the Chinese currency will buy more U.S. dollars in five years than it does now [see also ETF Research Report Now Available: China ETFs In Focus]. 

ETF Idea: There are currently three ETFs that allow U.S. investors to buy yuan-denominated bonds, including the PowerShares Chinese Yuan Dim Sum Bond Portfolio (DSUM). That fund holds about 35 different bonds, including debt issued by the Chinese government and some Western corporations. With a yield to maturity north of 5%, DSUM offers an opportunity to capture a bit of current yield while also participating in the yuan’s long-term appreciation. 

Disclosure: No positions at time of writing.