What are the hot exchange-traded fund investments for 2015? Here's what's got investment advisers talking at the annual Inside ETFs conference in Florida.
1) 2015: The year of the currency hedge.
The Swiss National Bank's surprise decision to abandon its currency peg with the euro, along with the imminent adoption of quantitative easing by the European Central Bank, has got global investors running to hedge currency exposure. Global banks everywhere are rushing to lower rates and cheapen their currency.
The hot ETF entering 2015 is the Wisdom Tree Europe Hedged ETF, which gives exposure to European stocks but hedges out the weak euro. It took in $5 billion last year and is still taking on assets. The difference between hedged and unhedged Europe was 12 percent last year.
This follows on the phenomenal success of the WisdomTree Japan Hedged Equity ETF (DXJ), which hedges out the yen and now has $12 billion in assets.
2) Low-volatility ETFs make a comeback.
The big worry at the conference is volatility. We are in for more of it. Already, the Dow Industrials has been trading in a 200-point range on a daily basis in January, well above the 2014 average of roughly 125 points.
There are concerns about the ripple effects of low oil, a possible Russian debt default, a Greek exit from the euro zone, and a possible shock to interest rates should the Federal Reserve decide to hike rates.
What does that mean? It means that minimum volatility products, which concentrate on stocks that will move the least in times of market turmoil, have again generated interest. The two biggest products are the S&P 500 Low Volatility and MSCI USA Minimum Volatility.
3) Energy investments.
This is the big dividing line among investment advisers: Buy energy stocks now or later? It's on everyone's list, and why not buy when prices are so low for energy companies? Any ETF related to energy has attracted huge flows in the last four months, particularly the SPDR Oil & Gas Exploration & Production ETF and the Market Vectors Oil Services ETF.
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They are motivated by historical trends. A 50-percent drop in oil is a rare event; it has only occurred five times in the last 30 years, and each time oil has been higher 6 months later, by an average of more than 50 percent.
If the historical pattern holds, this could be the right time to get in.
But picking the bottom is treacherous, because we have not been faced with this kind of supply glut. Energy stocks are certainly cheap, but the prospects of more asset write-downs and downward earnings revisions have others saying a better entry point will come later in the year.
Others are arguing that Master Limited Partnerships—like the Alerian MLP, which invests mostly in infrastructure for oil and natural gas—have been dramatically oversold and should not be so affected by a drop in oil and gas. But they too were sold heavily.
One other investments that is being talked about, but I don't see big money flows, is liquid alternative investments. I've heard about this category forever, but it keeps coming back, and it's showing up in ETFs.
Liquid alts, as they are known, provide exposure to asset classes other than traditional long ownership of stocks or bonds. They include long/short strategies, bank loans, Master Limited Partnerships and other infrastructure plays, and hedge fund replication strategies.
The argument is simple. The more diversified your portfolio, the less chance of a major loss should there be a downturn. The problem with this: In times of extreme stress, like 2008, we have seen alternative investments drop just as much.
Hedge fund replication has been tried for years. The Wisdom Tree Managed Futures Strategy Fund and theIndexIQ Hedge Multi-Strategy Tracker are two that seek to mimic certain hedge fund investment styles, but they haven't attracted much money.