Barring a dramatic December downturn, the major US indices are on pace for another year of double digit growth. 2014 has had its shares of growing pains, including a gloomy Q1 where the economy slightly contracted and a precipitous drop during late September and early October. Despite these downturns, 2014 will mark the 6th year of the current bull market. Since the 2008 low of 666, the S&P 500 has climbed well above 2000 and has closed at 44 record highs in 2014. Considering that the current bull market is the 4th longest ever in length and the 6th highest in terms of percent gained, is 2015 the year the tide turns? The macro economic data does not seem to think so with unemployment, corporate profits, and GDP figures all heading in the right direction. Here are some trends to look for in 2015 and the ETFs that will benefit from these economic scenarios.
Investing in America
The US economy is humming and there are few signs of it slowing. Falling oil prices have driven gas prices to four year lows, which will boost consumer spending in the coming year. The Consumer Confidence Index is soaring and 75% of S&P 500 companies matched or outperformed profit expectations for Q3. These headwinds point to a continued US bull run in 2015.
To capture this upside, investors should have significant exposure to the US markets. ALPS Sector Dividend Dogs ETF (SDOG) is a holding that should perform well in step with the US economy. SDOG offers exposure to undervalued high dividend paying stocks in every sector of the market while maintaining both diversification and upside potential. The ETF also offers a 30 day yield of 3.33%.
Foreign Fragility
Despite strong economic headwinds in the US, 2015 could be a year of slower growth in the global markets. A further slowdown from major economic players overseas could bog down U.S. companies in the upcoming year. U.S. equities are outpacing European equities by the widest margin in 40 years. The Eurozone finds itself on the edge of deflation as it documented a CPI of just 0.3% in September (Greece, Spain, Italy, Slovakia, and Slovenia all recorded deflation). Japan is amidst another recession as its economy contracted at a -1.6% annualized rate in Q3 following a -7.3% rate in Q2, and its government debt is now above 240% of its GDP. Couple these issues with China’s GDP growth rate being the slowest in five years, and the US could fall prey to these recessionary winds from abroad.
If the global economy ensnares the US in a period of slower growth, one can expect single digit returns for the major US indices in 2015. To supplement income in one’s portfolio during a period of slower growth in the equity market, we like Global X SuperIncome Preferred ETF (SPFF). Not only does SPFF pay out regular dividends, but it also has the ability to appreciate in value like a stock. Posting a 30 day SEC Yield of 6.67%, SPFF is an income generating machine for a diversified portfolio, which could be crucial in 2015.
Ramping up Volatility
2015 is the year of the sheep in the zodiac calendar, a symbol of peace and tranquility. Yet the headlines suggest that 2015 will be anything but tranquil. At the top of fearmongers’ list is the consequences of the end of quantitative easing. In 2015, the economy will be fully emerged in the fallout of the Fed’s largest stimulus cycle in history. Even the brightest economists are unsure of the consequences of years of massive cash injections. 2015 will tell if the QE plan constructed by Mr. Bernanke and carried out by Ms. Yellen lofted the economy by forcing investors into riskier investments, such as stocks, or if the trillions of dollars of cash merely created an asset bubble that will burst in the near future.
The monetary policy of the US also has dire consequences around the globe, especially in China, which is reliant upon the dollar as a peg. Any rumblings from the trillions of dollars injected into the global economy could shake the markets in ways unseen before. The end of QE coupled with continued unrest in eastern Ukraine and the Middle East could ratchet up the volatility of the markets in 2015.
In times of economic uncertainty, there is a need for downside protection built into ones portfolio. iShares MSCI USA Minimum Volatility ETF (USMV) protects its returns by investing in low volatility companies, which are less dependent on economic growth than the average company. Its highest allocated sector is health care, which has been the top performing sector in the current bull market, up +19.6% over the last five years.
It is during market downturns where USMV is most beneficial in protecting one’s portfolio. For example, in 2008, when the MSCI USA index was down -37%, USMV was only down -26%. More recently, USMV lost only -2.8% from September 15th to October 15th when in comparison the MSCI USA fell -5.5%. In addition to downside protection, the ETF also boasts a rock bottom expense ratio of 0.15%.
Preparing for the Road Ahead
Only time can tell how the markets will behave in 2015. Predictions are uncertain by nature. To this degree, investors should focus on the composition and structure of their portfolios. Flexible investment vehicles, like ETFs, are ideal for positioning your portfolio for success. ETFs are inexpensive and they are diversified because they hold dozens of individual stocks and bonds. You can find ETFs for every different market niche, which is important for portfolio customization. Whether 2015 will be bullish or bearish, utilizing ETFs can help you earn a steady return no matter direction the markets go.
