The "toilet paper and beer” trade will continue to be strong, even if American consumers spend less on luxury goods, travel, and holiday-season gifts, says ETF expert Tom Lydon. He likes two consumer-staples ETFs to capitalize on this spending. He also says investors should watch what’s happening with interest rates, and offers an ETF idea for investors to hedge against increases.
Kate Stalter: Today, I’m speaking with Tom Lydon of ETF Trends. Tom, as we all know, there’s been a great deal of interest in ETFs on the part of retail investors in recent years. Give us your take on the current market, and how investors should be viewing ETFs these days.
Tom Lydon: Well sure, Kate. There’s been a huge amount of money moving into the ETF space. In just 17 years, when ETFs first started, nobody imagined today that we’d be looking at over $1 trillion in ETFs and over 1,300 ETFs that are available.
It’s great, because it’s opened up the marketplace in many ways. Commodities and currencies that really weren’t available to the average investor in a simplistic way are now available. With offering so many choices and with the uncertainty that we’ve seen in the market in the past few years, it’s given the average investor an opportunity to diversify.
With currencies and commodities, we’ve seen with inflation threats and the clamoring for gold and metals as our currencies have been devalued, there have been great opportunities there. With emerging-market currencies getting more and more respect in the global market, there are opportunities to play currencies in areas like China and Brazil.
So ETFs have really helped the average investor diversify a little bit more, and also understand specifically what they’re allocating to at the right price. Because as you know, ETFs offer a great diversified option at a very inexpensive price.
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Kate Stalter: You just brought up the idea of some of the currency trades recently. You wrote a column not too long ago about the rising dollar, and some ETFs to look at with that development. Can you tell us a little about that, Tom?
Tom Lydon: Well sure. Everybody’s got their eyes on what’s going on over in Europe. The concern is that there’s not a real solid game plan as far as not just Greece, but other European countries that may be challenged right now.
That surely hasn’t helped the euro, and you’ve seen more of a flight out of the euro towards some stable currencies. In the past, you wouldn’t look at the Chinese yuan or other areas like Mexico and Brazil as being solid areas to invest in, but compared to the euro these days, they look much more favorable.
The dollar and specifically the PowerShares DB US Dollar Bullish Fund (UUP), which is the bullish dollar ETF, has been getting a lot of traction lately. If you’re concerned about the European areas, and that area going lower, the dollar currency for the short term, I think, is going to be that much stronger.
Kate Stalter: How about some other currencies or other developing markets that people might want to take a look at?
Tom Lydon: Well, the overall concept about investing in emerging markets five years ago was deemed risky, but not just from an equity standpoint, but really from a sovereign debt standpoint.
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You’ve got countries like China, like Brazil, areas like Australia from a balance-sheet standpoint, looking much better than a lot of European countries…and frankly, look better than the US. So investors, as they’re looking at currency opportunities, are diversifying in these areas, and ETFs provide great opportunities to do that.
Kate Stalter: Any particular ideas that investors might want to take a look at right now?
Tom Lydon: Something I think that has been on many investors’ minds has been the Treasury market. I mean, we’ve seen with 50- and 60-year declining interest rates and the flight to quality to Treasuries, it’s been unprecedented.
But the thing is, at some point in time, not just global economies, but the US economy is going to get a little bit more traction, and we will be in a situation where we’ll have higher interest rates. You’ve seen a trillion dollars just in the past few years move out of equities and into bond-related ETFs and bond funds.
Interest-rate risk is going to be a major issue to tackle down the road. So hedging your fixed-income investments in the fixed-income portion of your portfolio is going to be very critical.
The ProShares group actually has some inverse Treasury ETFs where you can buy a small amount to hedge against rising interest rates. One in particular, which is one of their largest, is the ProShares UltraShort 20+ Year Treasury (TBT).
Now a couple words of warning here as we slap a warning label on it: It’s important to understand that these, especially leveraged ETFs, reset daily. So these are really just meant for more sophisticated investors, who are really watching their portfolio closely.
We’ve seen this ETF just in the last week, we’ve seen a little bit of a bump in the market. We’ve seen Treasuries start to decline a bit and that bodes very well for the short-Treasury ETFs.
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Kate Stalter: Thank you for the note of caution there for traders or investors who may not be able to watch their holdings all day long.
Tom Lydon: This is not a buy-and-hold position. But I think what we’re all agreeing on is: Down the road, once we see some stabilization in the economy, that our US government is clamoring to raise rates because of the debt situation.
So they’re not going to do it quite yet, but once they get into that situation, we’re already going to see internal rates rise. So watching Treasuries is going to be a popular thing to do in the coming months and it’s something we all should be watching closely.
Kate Stalter: Tom, let me just ask you one more question today regarding sector strengths when it comes to ETFs. Any particular sectors that you believe might be showing potential?
Tom Lydon: There are some retail numbers that are decent, but I think most importantly when you look at consumer staples, folks aren’t spending as much time traveling, they’re not spending as much time on luxury goods, they’re not spending as much time in supermarkets, but you just can’t help with the basics—you know, toilet paper and beer. Those are things that people are going to continue to spend time shopping for.
A couple of consumer-staples ETFs that we like are the Consumer Staples Select Sector SPDR Fund (XLP) and then the Vanguard Consumer Staples ETF (VDC). Those are a couple of the most popular consumer-staples ETFs.
I think what we’ll see as we continue to get into the holiday season, we’re probably during this economic time not going to see a lot of overspending, but more concentration on the basics. So that’s a sector I think that will continue to bode well while our economic situation hopefully improves.
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