Prudential PGIM Active High Yield Bond ETF (PHYL) is a new investment that those saving for or livin...
5 Megatrends and ETFs to Play Them
06/24/2014 9:00 am EST
These long-term trends in demographics, politics, and economic policy are global in nature and tremendously powerful, and investors can profit as these trends unfold using select ETFs, says Michael Johnston of ETFdb.com.
Over the last several years, ETFs have become popular tools for active investors seeking to take advantage of short-term mispricing 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 daytraders who measure their holding periods in minutes rather than years.
Of course, ETFs also continue to be tremendously powerful tools for the group 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.
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.
India Is Urbanizing and 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.
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 EG Shares 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 Indian middle class.
NEXT PAGE: Baby Boomers Are Retiring|pagebreak|
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 US 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 US. 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.
ETF Idea: Many of the ETFs in the health care and biotech 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%.
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 people 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.
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.
NEXT PAGE: The Rise of Natural Gas; Appreciation of China's Yuan|pagebreak|
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 US 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, too. 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.
ETF Idea: There is a number of natural gas ETFs 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, represents 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. As such, 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.
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 US dollar. Though any appreciation will be moderate, it seems inevitable that the Chinese currency will buy more US dollars in five years than it does now.
ETF Idea: There are currently three ETFs that allow US 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.
By Michael Johnston of ETFdb.com
Related Articles on ETFs
Rather than relying solely on past performance, CFRA combines holdings-level analysis with additiona...
This stock market is flailing around like a fish out of water, with whipsaws increasing every week, ...
Despite all the headlines about the trade summit with China, it’s interest rate expectations t...