Contrary to popular belief, there is nothing special about the month of January from an investment perspective.
I’m not a big believer in the “Santa Claus rally” or in the “January effect” — the popular names given to the market’s tendency to post good returns in December and January — because seasonal patterns like these tend to get trumped by whatever the prevailing market trend happens to be.
In other words, in a good, healthy cyclical bull market, December and January should see decent returns — along with the other 10 months.
Coming off one of the best market years since the 1990s, I expect to see a strong start to 2014. But January is a great time to rebalance and reallocate your portfolio, or, if you’re making your annual IRA or Roth IRA contribution, a great time to put new money to work.
Today I’m going to offer my five favorite ETFs to start 2014.
iShares MSCI South Africa ETF
I’m going to start with one that might sound a little exotic, but it’s one of my very favorite single-country ETFs for 2014 and for the rest of this decade: the iShares MSCI South Africa ETF (EZA).
I’ve been a major Africa bull for years, as I believe that Africa is the only region capable of delivering “China-like” growth rates over the next decade. South Africa is the largest and most developed economy in sub-Saharan Africa, and it also has the most liquid stock market.
South African companies are quietly emerging as regional leaders, taking on established Western competitors. In fact, Western competitors are finding it easier to simply buy out their African competitors rather than slug it out, as was the case in Walmart’s (WMT) 2012 acquisition of South African mass retailer Massmart.
Being a collection of South African companies, you might expect EZA to be loaded up with gold miners and other resource stocks. Yet basic materials and energy combined only make up about 21% of the portfolio. Nearly 28% is invested in communications, led by regional mobile telecom provider MTN Group (MTNOY), and roughly a quarter of the ETF is invested in the financial sector. Consumer cyclicals chip in another 13%, and healthcare and consumer defensives add about 7% and 5%, respectively.
EZA has an expense ratio of 0.61% (or $61 per $10,000 invested), and total net assets of $464 million.
EG Shares Beyond BRICs ETF
Continuing the emerging markets theme, I recommend the EG Shares Beyond BRICs ETF (BBRC).
I’ve never been a big fan of the “BRIC” concept because it has always seemed like more of a marketing ploy that a real investing theme. There is no particular investment reason why Brazil, Russia, India and China should be lumped together … and frankly, no reason why a decrepit petrostate like Russia should be included at all if you’re looking for emerging-market growth.
The BBRC ETF has a 75% weighting to more advanced emerging-market economies — such as Mexico, Indonesia and Turkey — and a 25% weighting to up-and-coming frontier economies, such as Nigeria, Kenya and Vietnam.
Significantly, the index excludes the BRIC countries as well as already-developed markets such as South Korea and Taiwan that tend to dominate emerging market indices. It’s a one-stop shop for the countries to which most investors have little or no exposure, and comes with a 0.58% net expense ratio.
If you believe — as I do — that 2014 will be a strong year for emerging markets, then BBRC is a good option.
The Cambria Shareholder Yield ETF
Returning to the United States, I see quality, dividend-paying stocks outperforming their junkier peers in 2014. When investors discover that the dreaded Fed tapering isn’t nearly as bad as they feared, I expect a rally in income-focused investments.
If you want to invest in a basket of high-quality, shareholder friendly stocks, a great ETF option is the Cambria Shareholder Yield ETF (SYLD). SYLD is an actively managed ETF that invests in 100 stocks with market caps greater than $200 million that rank among the highest in three categories: paying cash dividends, engaging in net share repurchases, and paying down debt on their balance sheets.
Any of these criteria alone would be a good screen for quality, good management, and shareholder friendliness. When you take them together, SYLD becomes a veritable super-ETF. Its expense ratio is 0.59%, comparable to other ETFs on this list.
The ETF’s manager is renown quant guru Meb Faber, who happened to be a fellow contestant in the Best Stocks of 2013 contest. I’m a big fan of Faber’s work, and I believe he’s created a fantastic long-term investment vehicle in SLYD. Buy this ETF in January and be prepared to hold on to it forever.
Market Vectors Wide Moat ETF
Continuing the high-quality theme, I want to recommend another relatively new ETF, the Market Vectors Wide Moat ETF (MOAT).
The ETF gets its name from an old quote from legendary investor Warren Buffett. Buffett has repeatedly said that he likes companies with businesses that are “surrounded by wide moats,” or durable competitive advantages that make them virtually unassailable.
MOAT is based on the Morningstar Wide Moat Focus Index, a concentrated list of 20 stocks that Morningstar classifies as having a “wide moat.” To avoid overpaying for quality, Morningstar values all of the stocks that match its “wide moat” criteria and only selects the 20 that are most attractively priced.
Not too surprisingly, long-time Buffett holding Coca-Cola (KO) appear on MOAT’s portfolio, as does Berkshire Hathaway (BRK-B) itself. One of my favorite stocks at current prices — and a current recommendation in Macro Trend Investor — is pipeline general partner Kinder Morgan Inc. (KMI). Net expenses for MOAT run 0.49%, a bit cheaper than the other ETFs listed here.
Whether or not you buy MOAT, I do recommend that you study its underlying holdings and use them as a starting point for further research. The ETF is reconstituted each September, and there is generally a fair amount of portfolio turnover.
PowerShares International Dividend Achievers ETF
Finally, if you believe, as I do, that international stocks are poised to offer better returns than U.S. stocks in 2014, I recommend the PowerShares International Dividend Achievers ETF (PID), which is essentially an international version of the Vanguard Dividend Appreciation ETF (VIG) — another great ETF I have recommended over the years.
To qualify as an International Dividend Achiever, a company must have raised its dividend for a minimum of five consecutive years in its reporting currency. (You have to be careful when doing your own research here; sometimes dividends can appear to rise and fall in dollar terms due to nothing more than currency moves.) PID’s holdings must be incorporated outside the United States, but must trade as an ADR, GDR or on the U.S. or London exchanges.
PID’s portfolio is practically a “who’s who” list of high-quality international stocks. Among its holdings are long-time Macro Trend Investor “Drip and Forget” recommendations Unilever (UL) and Diageo (DEO). Its total expense ratio is 0.56%, right in line with my other recommended ETFs.
The past five years have been rough ones for the general market, to say the least. Any company that has been able to raise its dividend throughout the past five years of serial crises is one that is worth considering for investment. And PID has an entire portfolio full of them.
Charles Sizemore may hold the aforementioned securities in his Macro Trend Investor portfolio.
