Last week, Jeff Reeves wrote about five exchange-traded funds that have held up well during the rocky market environment of the past few months. Now, let’s take that one step further: Of the roughly 1,300 ETFs currently available for investors, which are among the best bets to buy now and hold for the next three years?
The three ETFs are similar in that the strength in their underlying, long-term themes should enable them to overcome the various near-term concerns that drive market performance on a day-to-day basis. At the same time, their soft one-year returns provide investors with the opportunity to take advantage of these themes while prices are somewhat depressed.
Global X Brazil Consumer ETF (NYSE:BRAQ)
One-year return through last Friday: -27.14%
The emerging markets consumer story is no secret. Rising disposable income, low credit penetration, young populations, and solid economic growth makes the “rising domestic consumption” story one of the most compelling long-term themes in the market today. Emerging markets already have a larger share of consumption than the developed world, and this gap is set to explode higher in the years ahead.
Brazil is at the forefront of this trend. Over 60% of its economy, which is now the 10th-largest in the world, is driven by domestic consumption. Like most emerging market countries, Brazil features a rising population, robust wage growth, and increasing personal wealth. However, Brazil also has two other important attributes. First, it has a relatively low exposure to the problems in Europe, and second, its stable economic and political management limits the potential for negative surprises. As a result, the country stands apart from its peers in both the developed and emerging markets.
More important in the case of this ETF, Brazil is still seen as a commodity play. Its market therefore sells off when commodity prices weaken, as we witnessed in the middle of this year. This creates an opportunity benefit from discounted shares of companies that operate in the huge segment of the Brazilian economy that isn’t directly commodity-related.
There’s no doubt that BRAQ is small and volatile, but it offers investors a way to take advantage of one of the most important trends in the BRIC asset class and the global economy as a whole – and to do it at a price well off its high for the year. Having said that, BRAQ has rallied sharply from its early October low, indicating that a measure of patience is advisable here.
iShares S&P Emerging Markets Infrastructure ETF (NYSE:EMIF)
One-year return: -17.78%
EMIF is another way to take advantage of a situation where the long-term theme remains intact but the related ETF has fallen sharply due to broader macro concerns. Emerging markets countries continue to build out their infrastructure to accommodate enormous societal shifts. In China, for instance, the urban population is projected to grow by 530 million people in the next 20 years. Compare that to the U.S., where the total population is about 307 million.
Emerging markets also have vastly better government finances than the developed world. Unlike the U.S. and other major world powers, the emerging markets actually have the cash to put to work. And thanks to the ultra-low rate environment put into place by the world’s largest central banks, corporations have a lower hurdle rate in order to invest in new projects. Notably, emerging market governments have already committed well over $3 trillion to future projects, creating a large backlog of potential revenue for companies that build roads, electricity networks, and water-related infrastructure.
Stocks of these companies have much to gain in the coming years, and EMIF provides a way to capitalize on the trend and still maintain diversification on the geographic and individual company level. In addition, it offers a nice yield of about 3.5%. As with BRAQ, the stock has staged an impressive relief rally in recent weeks, so it may pay to wait for a pullback.
Market Vectors Uranium & Nuclear Energy ETF (NYSE:NLR)
One-year return: -15.95%
The largest reason for the underperformance of nuclear and uranium-related shares is the Japanese earthquake and lingering fears that countries are going to abandon their commitment to nuclear power in favor of safer options. Germany made headlines when it abandoned its nuclear program, obscuring the fact that China, India, and Russia have made no such shift. The rising power demands of the growing emerging market population is a longer-term trend that remains firmly in place, and NLR – which holds uranium miners, utilities, and stocks of companies that build nuclear plants – is uniquely positioned to benefit. As a kicker, the ETF offers a yield north of 5.5%.
It’s also notable what didn’t make this list. Some of the worst ETF performers of the past year are inverse funds and those tied to the performance of and the alternative energy industry. While their price performance may indicate an opportunity, both segments remain dangerous propositions. Inverse products are unsuitable for a long-term holding period due to the compounding of tracking error, while the combination of fragile finances of developed-market governments to provide political support makes alternative energy stocks little more than a crapshoot at this point.
Conversely, the three ETFs mentioned here offer the ability to take advantage of some of the most important trends in the global economy. Investors who can hold on through the inevitable bumpy ride should be well-rewarded in the coming years.
As of this writing, Daniel Putnam did not own a position in any of the aforementioned stocks.