In this article, I will be constructing a simple portfolio of ETFs that track major trends in the domestic economy as well as the global economy. For each trend, I will describe the rationale behind why I choose to include the trend, as well as an associated ETF to play that trend.
Trend #1: Aging Population
With the populations of many developed economies like the United States and Japan aging, the need for health care products, specifically medications, is growing. Biotechnology companies can research new drugs to attempt to either treat illnesses or help prevent illnesses.
For example, how many heart attacks or strokes have been prevented because of the use of statins like Lipitor? By taking a pill every day, it can reduce the risk of having a heart attack or stroke, and thus reduces the risk of having an expensive trip to the hospital for heart surgery, which in the end can save money. In a world where governments are trying to reduce costs, I think it makes a lot of sense to encourage preventative medicine, and biotechnology companies can help with that. Below is the ETF I selected that tracks biotechnology companies.
iShares Nasdaq Biotechnology (NASDAQ:IBB)
The Fund seeks investment results that correspond to the performance of companies primarily engaged in the biotechnology industry, as represented by the NASDAQ Biotechnology Index®.
Trend #2: Rising Global Food Demand
With the rising global population and expansion of the middle class in Emerging Markets, there is a greater need every year for more food worldwide. Earlier this summer, a severe drought hit the breadbasket of the United States. With the lack of supply, the prices of agricultural commodities jumped. Therefore, companies that make products like fertilizer that help crop yields, or engineered seeds that can better withstand a lack of water, I think are important not just to the United States but everyone globally.
I am not old enough to remember the gas crisis of the 1970s and all the problems that occurred because of that, but to me what would be even worse would be a food crisis where because of drought or other factors there wouldn't be enough food to adequately feed the population. Taking into account those factors, I believe companies that aid in aiding in increasing crop yields and quality are very important. Below is the ETF I selected that tracks Agribusiness companies.
Market Vectors Agribusiness ETF (NYSEARCA:MOO)
The Fund seeks to replicate as closely as possible the performance of the DAXglobal® Agribusiness Index. The Index provides exposure to companies worldwide that derive at least 50% of their revenues from the business of agriculture.
Trend #3: North American Energy
The North American energy boom has started the United States on a path to energy independence from the rest of the world. This issue has been a campaign point for both Mitt Romney and Barack Obama, and both see that greater North American energy production is a positive aspect that can create jobs regardless of the candidate. Because some of the new sources of oil and gas are out of the way in Canada and North America, there is a need to build new pipelines to transport the oil and gas to refineries and storage facilities.
Not to get to political but personally I hear both candidates talking about new pipelines that should be constructed in the future, in addition to the large amount of new pipelines that have already been built, but I have heard neither candidate talking about expanding refining capacity. Just look at the example of California, where there was a fire a major refinery, and because of the lack of capacity gas prices shot up for residents on the west coast. I would much rather see if the government "invest" in extra refining and processing capacity that invest in companies likes Solyndra, or A123 System, both of which have filed for bankruptcy.
The extra refining capacity would be something that would help the American people immediately because of the age and condition of the current refineries in the United States, which will inevitably lead to more closures because of repairs/upgrades or accidents. According to the EIA [Energy Information Administration] the last significant/ sophisticated oil refinery that was constructed was in 1977 in Garyville, Louisiana. Below is the ETF I selected that tracks Energy infrastructure companies in North America.
First Trust North American Energy Infrastructure (NYSEARCA:EMLP)
The First Trust North American Energy Infrastructure Fund is an actively managed exchange-traded fund. The Fund will invest primarily in publicly-traded master limited partnerships and limited liability companies taxed as partnerships ("MLPs"), MLP affiliates, Canadian income trusts and their successor companies, pipeline companies, utilities, and other companies that derive at least 50% of their revenues from operating or providing services in support of infrastructure assets such as pipelines, power transmission and petroleum and natural gas storage in the petroleum, natural gas and power generation industries.
Trend #4: Cloud Computing
The rise of the internet, smart phones and applications for each has greatly expanded the use of cloud computing services. Cloud computing lets customers or users access data without having it stored in the memory of the device that you are using. For example, say you have a word document saved on your computer, were on your way to work, and realized you forgot it, before cloud computing you would have to turn around and go back and download it off your computer or email it to your work email address. Now with cloud computing you can save that same word document on a service like Google Drive and access it from any computer or smartphone that has the internet. Companies using cloud computing can save money because they do not have to have a large amount of hardware in the office to store massive amounts of data, instead the data is stored at enormous data centers. Below is the ETF I selected that tracks Cloud Computing companies.
First Trust ISE Cloud Computing Index (NASDAQ:SKYY)
The Fund seeks to reflect the performance of the ISE Cloud Computing Index, which tracks stocks that are engaged in a business activity supporting or utilizing the cloud computing space.
Trend #5: Record Corporate Bond Issuance
Many corporations are in the best shape they have ever been in, and with the low rate environment, companies can lock in low borrowing costs for the next 10-30 years. With fixed income investors looking for yield in the current low rate period, they look at the fixed income market, and see a 10-Year US Treasury bond yielding 1.72% as of the time of writing this article. Then they look and see the FINRA/Bloomberg Investment Grade U.S. Corporate Bond Index, which tracks investment grade corporate bonds having an average yield of 3.18%. I personally believe that corporation's balance sheets are better off than the US Governments "balance sheet" and I believe that investment grade corporate bonds could provide better risk adjusted returns than US Treasury Bonds. Below is the ETF I selected that tracks investment grade US Corporate Bonds.
iShares iBoxx $ Invest Grade Corp Bond (NYSEARCA:LQD)
The Fund seeks to replicate performance of the corporate bond market as defined by the iBoxx $ Liquid Investment Grade Index. The index is designed to provide a broad representation of the US Dollar-denominated liquid investment grade corporate bond market.
ETF Holdings and Return Data Table
Below is a table with each ETF broken down by the top three holdings, as well as the price performance for each ETF so far this year.
IBB Price Performance YTD
IBB Top 3 Holdings
% of ETF
Regeneron Pharmaceuticals Inc
Alexion Pharmaceuticals Inc
MOO Price Performance YTD
MOO Top 3 Holdings
% of ETF
Potash Corporation of Saskatchewan Inc
EMLP Price Performance Since Inception (6/27/2012)
EMLP Top 3 Holdings
% of ETF
Kinder Morgan Management LLC
Enbridge Energy Management LLC
Williams Companies Inc
SKYY Price Performance YTD
SKYY Top 3 Holdings
% of ETF
Rackspace Hosting Inc
Aruba Networks Inc
LQD Price Performance YTD
LQD Top 3 Holdings
% of ETF
AT&T 6.55% Coupon Due 2039
Wal-Mart 6.50% Coupon Due 2037
GE Capital 5.88% Coupon Due 2038
Now I will talk about a few of the risks associated with some of the above trends. With biotechnology stocks there are always companies that have massive runs but can be derailed by bad data or a failed study, which is why biotechnology stocks and ETFs can have considerably more volatility than the S&P 500. The risk with agribusiness equities is if there is a crop surplus, the need for fertilizer used by farmers could potentially be reduced. One risk with Energy infrastructure companies is the cost of building pipelines and storage facilities. Another risk for energy infrastructure companies is political risk; a great example of this was seen earlier this year with the Keystone Pipeline.
The risk with cloud computing companies is that sometime in the future just like other technologies have done in the past, cloud computing will be obsolete and something better will come along to replace it. Finally, the risk to investment grade bonds is that if interest rates rise, and depending on the duration of the bonds held in the index, the underlying bonds could be negatively affected by the increase in rates. Overall, I believe that all five trends are multi-year to multi-decade trends that will shape the economy of the future, not just the economy of the United States but the global economy as well.