3 Best ETFs for 2015’s Biggest Economic Trends

When it comes to investing, the more things stay the same, the more things change.

best index funds ETFsEvery year is slightly different, and portfolios need to react to these changes if they are ever to be successful. Even though 2015 is still relatively young, some overarching themes are beginning to play out in the markets.

The trio of growing market volatility, major currency fluctuations and rising interest rates are already making themselves known and should continue to play out for the rest for the year.

And, if investors aren’t careful, all three trends have the ability to upend a portfolio and its returns.

Lucky for investors, these themes are totally exploitable via exchange-traded funds (ETFs). By investing in the best ETFs that combat these growing problems, investors can protect their portfolios and profit even when the chips are down.

Here are the best ETFs to buy for 2105’s biggest themes.

Best ETFs for 2015’s Biggest Trends — Volatility

isharesThe volatility of an asset is essentially the amount of uncertainty around the size of changes in a security’s value. In other words, the price of a stock can change dramatically over a short time period — in either direction. Periods of high volatility are what causes the stock market to soar one day, only to fall the next.

That roller coaster can make some investors seasick, and after a few years of quiet, it seems that 2015 is shaping up to be a volatile one.

Enter the iShares MSCI USA Minimum Volatility ETF (NYSEARCA:USMV).

USMV attempts to smooth out the ride by scaling back its risk exposure, while still maintaining a position in equities. The ETF follows an index composed of U.S. stocks that have lower volatility characteristics relative to the broader U.S. equity market. Basically, USMV won’t “swing” as much as the broad market, which can make it a godsend in periods of high volatility by preventing major losses.

Top holdings for USMV include steady blue chips like Automatic Data Processing, Inc. (NYSE: ADP) and Wal-Mart Stores Inc. (NYSE: WMT).

USMV is one of the best ETFs for cheap protection. The $4.5 billion fund only charges 0.15%, or $15 per $10,000 invested.

Best ETFs for 2015’s Biggest Trends — Currency

WisdomTree185The U.S. dollar recently hit seven-year highs against the Japanese yen and reached a two-year high against the euro. While that might seem great for the U.S. economy, it doesn’t translate so well into portfolio gains.

Why? Because currency fluctuations can hinder investments in international stock ETFs and mutual funds.

There’s a two-part total return element to owning foreign assets. The first part is how the stock performs in its local currency — Euros, Yen, Bhatt, etc. The second part is how that currency performs relative to the U.S. dollar. With the greenback surging over the last few years and showing no signs of stopping, returns on international stocks and ETFs have been crimped.

So what do you do? Take the currency effect out of the equation with one of the best currency-hedged ETFs — the WisdomTree Europe Hedged Equity ETF (NYSEARCA:HEDJ).

The $10 billion ETF tracks a basket of European blue chips and then uses swaps, futures and other instruments to remove the various currency effects. What investors are left with are “pure” stock market returns. That strategy has definitely worked for HEDJ. Over the last three years, the ETF has returned more than 17% annually, besting non-currency hedged international rivals.

HEDJ costs 0.58% in expenses, which is a small price to pay, considering a rising dollar could zap your returns considerably more than that.

Best ETFs for 2015’s Biggest Trends — Rising Interest Rates

FirstTrust185Rising interest rates have been telegraphed by investors and analysts for years now. However, 2015 may finally be the year when the Fed decides to raise rates. That increase could hurt a variety of bond investors moving into longer durations to gain yield. Bonds with longer durations fall harder when rates rise.

But with shorter duration bonds and cash basically paying nothing, what’s an investor to do?

Thanks to ETFs, you could employ a hedge fund trick and go both long and short with the First Trust Tactical High Yield ETF (NYSEARCA:HYLS).

HYLS first shorts positions in various treasury bonds. That short position provides some cushion as bond prices fall in the wake of rising interest rates. At the same time, the ETF will take long positions in high-yield and corporate bonds to pick up some current big income. Investors get a high current yield and protection against rising interest rates.

The fund’s average duration is currently around three years. However, if you take away the short positions, the average maturity is more along the lines of six years. Meanwhile, the ETF yields a healthy 5.78%, with expenses running 1.28%.

Given that interest rates should rise this year, HYLS makes a great way to score some income, while still protecting your portfolio against the Fed’s decision.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

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