Top Pick ETFs for 2016
It’s time to think about your new portfolio after these months of high volatility which has create new opportunities
New year, fresh start.
2016 started on the wrong foot with bad news from China and disappointing corporate profits from the USA. If already this isn’t enough, the oil price is just heading south testing the liquidity of energy companies and their borrowers.
While recent headlines have focused on the energy downturn, I believe long-term macroeconomic factors will push energy stocks up over time.
Investors with a 10-year time horizon have a once-in-a-decade opportunity to buy great energy company’s stock at a significant discount.
Markets around the world entered a bear market by losing more than 20% from the heights of last June 2015.
It is bad, but it has created an opportunity to get into the market with some fresh cash and make your money to work hard for you over the next decade.
I’ve researched the best ETFs to buy with a long term horizon for the next 10 years.
Where Did I start My Research For The Top ETFs
The first place where I looked is the energy and commodity sector.
Hey, don’t tell me if I’m crazy, or I’ve slept in a cavern for the last 8 months, I’m not a bear. I’m aware these sectors have been a disaster for the last 2 years for the energy sector and around 3 years for commodities.
Because I’m looking to accumulate my savings in some beaten hard ETF for the next decade, beaten indexes offer better returns for my money.
Most probably, energy and commodity stocks will stay low for the next 5 years while I’m going to accumulate with fresh cash every year buying positions at a high discounted price.
Once these cyclical sectors regain traction, the road will head one way; HIGH.
What characteristic the perfect ETF should have:
~ LOW COST; I’m interested only in the cheapest ETFs. Management fees under 0.5% per year are worth considering. Keeping costs low while investing for the long term will increase your total return over the period, due the fact power of compounding is exponentially increasing your wealth.
~ LIQUIDITY; Liquidity is a safe factor especially during times of financial stress. What would you do if you can’t sell your investments or sell it to discount rate because of low liquidity? For every seller should be there a buyer.
~ AGE; I like aged ETFs with proven track record. A good ETFs will not be replaced.
1) SPDR S&P Metals and Mining ETF
This ETF gives you the opportunity to track 7,500 companies from 47 countries around the world in the metal and mining sector.
It is the only ETF that offers an opportunity to invest in this area because other ETFs are too small consequently less liquid.
It follows the metals and mining segment of a U.S. total market composite index, so no foreign currency and company exposure.
Usually, when commodities price rises, the dollar drop which will affect this investment.
Facts
SPDR S&P Metal and Mining ETF is liquid with an average daily trading volume of 2.3 million shares with a total asset of $294 million under management.
The Fund offers a generous dividend yield of 2.8%. This ETF has lost 47% in one year and 30% over three years.
This is the reason I’m bullish to invest in this fund for the long-term; GREAT VALUE FOR MONEY.
The fund’s annual portfolio turnover ratio is high at 38% together with the annual fees of 0.35%.
Info
The world needs resources. Considering the last two years have been hard for mining companies which cut cost aggressively, should create a restraint supply in the next five years favoring a pick in oil price.
Action
Time to accumulate and hold till it doubles in value before considering rebalancing your portfolio away from this sector.
2) Vanguard Energy ETF
The demand for energy is expected to grow at 1.4% thought 2035.
This is the good news, so what is the bad one?
There are about 2 million barrels per day of extra oil for some time now, creating a glut.
No wonder the price of petrol at the gas station is so low.
So, what to expect for the next 10 years?
A rebound in oil’s price of course. It’s trading below US$ 30 at the moment. In the last year, oil companies around the world have shut down oil wells at record speed and cut investments which will dump future production.
It is unluckily “new energy” will replace oil in the near future (sorry Tesla), we aren’t ready yet, and the world is still highly dependent on oil.
Facts
Vanguard Energy ETF is a liquid fund with a total asset of $4.4 billions under management.
The Fund offers a generous dividend yield of 3.3% per year. This ETF has lost 22% in the last year and I’m confident we have reached the bottom. It is unluckily the oil price will go any lower, but predictions call for a higher price at US$ 50 for the next 3 years.
The fund’s annual portfolio turnover ratio is very low at 4% and an annual fee miserable at 0.10%. This ETF is a great value for money.
Info
The oil sector is entering its two years of bearish sentiments because improved technology in extracting oil and China slow down.
Action
Time to accumulate and hold till it doubles in value before considering rebalancing your portfolio away from this sector.
3) IShares MSCI Hong Kong ETF
The iShares MSCI Hong Kong ETF (NYSEARCA: EWH) is one of the most widely traded, and therefore most liquid, Chinese ETFs.
Facts
It is been launched by BlackRock in 1996, one of the oldest ETFs.
The average trading volume is $58 million with a total asset of $2.5 billion under management (AUM). The fund’s annual portfolio turnover ratio is a modest 7% which is an essential factor to keep its expense ratio at 0.48%.
The fund offers a dividend yield of 2.51%. The 10-year average annualized return is 7.41%.
Info
This ETF is made up of a diverse selection of small, large and mid-cap stocks primarily traded on the Hong Kong Stock Exchange, tracking the MSCI Hong Kong Index.
Hong Kong, being a financial hub is reflect in the allocation of investments for this ETF which account for approximately 70% bank sector, the next two most heavily represented sectors are consumer cyclical and utilities.
Action
This ETF valuation below P/E 10 is attractive, and MSCI Hong Kong Index went for a correction in the last 8 months because of the shaky China.
I believe the bad days of China aren’t over which will impact Hong Kong negatively shortly.
It’s a buy for the long-term investors, but I would wait for an opportunity to get in.
4) Vanguard Health Care ETF
Established in 2004, this ETF track the health care sector.
The health care industry is going strong.
The massive European and USA baby boomers are entering in their late days of life, and they required more medical attention, medication, and pills. Health care companies are cashing in this boom.
Every year only in America, 3 million people turn 65 or the 1% of the total population of the 300 million Americans.
Pharmaceutical innovation appears to be moving rapidly with new drugs and exciting technologies, keeping elderly people alive longer consequentially consuming more in health-related services.
Facts
The fund contains 344 companies with the largest weighting for pharmaceutical companies at 36%, followed by biotechnology with a weighting of 23.5%.
The third largest sector for holdings is health care equipment with a weighting of 14%.
Vanguard Health Care ETF is very liquid with average daily trading volume of $45 million with a total asset of $6.9 billion under management
The fund offers a nominal dividend yield of 0.9%. From its inception, this ETF has returned about 10% per year.
The fund’s annual portfolio turnover ratio is a modest 7% which is an essential factor to keep its expense ratio of 0.09%.
Info
The fund is gear forward large companies missing out on startup and smaller biotech companies opportunities. However, this ETF is reliable and stable.
Action
Waiting for some correction before getting in, considering this ETF index has double in value in the last 3 years and currently the price-to-earnings (P/E) ratio is over 29, which is relatively high.
5) Vanguard Total World Stock ETF
This ETF offer the opportunity to track 7,500 companies from 47 countries around the world.
I want to ask you something; “Do you think the world will grow in the next 10 years?
If yes, this ETF will be worth your time and money.
Facts
Vanguard Total World Stock ETF is very liquid with an average daily trading volume of $45 million with a total asset of $8.03 billion under management.
The Fund offers a generous dividend yield of 2.6%. From its inception in 2008, this ETF has returned about 5.7% per year.
The fund’s annual portfolio turnover ratio is only 7% as other big ETFs which is an essential factor to keep its expense ratio of 0.14%. P/E is at 15%.
Info
This ETF will not give you bad surprises in the long term, keeping a constant pace with world growth.
Action
It is a good time to start accumulating after the last 2 months correction which decreases this TEF value by a whopping 20%.
UPDATE; 7 July 2016
6) Global X Funds – Global X Lithium ETF (LIT)
There is only an ETF to invest in lithium, but what is lithium and why should be interesting to invest?
Lithium is a mineral that looks similar to silver. There are many uses of this material in industries, but what catch my attention is the fact lithium is used in batteries.
I know, batteries have been around for a while, but today the batteries are getting bigger and the possible commercial use is going skyrocketing thanks to Tesla Corporation.
Tesla is mass producing electric cars, and other carmakers are catching up. This new tech company is going to change the world.
To produce a battery for a car we need 10 Kg. of lithium. The proven reserves are 13 million tons. With that amount, we can produce 1.3 billion cars.
At the moment we are producing 60 million cars per years, so the proven reserve of lithium are enough for 21 years of production without considering all the phone batteries, small batteries, etc. So to be rational, 15 years is the max we can hope for.
Lithium_world_production from 1920 till 2020. The interesting fact is while the production is skyrocketing, the future demand will be massive, and that is telling me one thing, miners companies with lithium reserve are going to be rich.
So, what about Global X Lithium ETF?
This ETF invest in any companies has to do with Lithium, from miners to chemical companies. So, the increasing demand and relative price of Lithium can do a favor for miners but jeopardize businesses that use the product if they can’t pass the extra cost to consumers.
However, this ETF will benefit from the demand in general for the products that uses this material. Considering the demand is going higher and higher, it is worth to buy.
Some analytical:
Facts
Global X Lithium ETF is a relatively liquid investment with assets under management of $68 million.
The fund has a mere dividend yield of 0.2% and P/E at 18%. From its inception in 2008, this ETF has returned about 5.7% per year. From 2012 till today this ETF has lost half of its value and most probably reached its bottom in January 2016.
The fund’s annual portfolio turnover ratio is high at 31%, and the cost is 0.75% per year.
Info
Considering the bright future for Lithium with increasing demand, it’s a good time to accumulate after this ETF got beat out in the last years.
However, if you can bother to buy miners share directly, miners like Critical Elements Corporation (CRE.V) can offer an excellent ROI.
UPDATE; 17 August 2016
7) VanEck Vectors Rare Earth Strategic Metals ETF
Not yet analyzed.
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4 comments
Some very interesting picks and summarized — a good investment case can be made for the sectors/ETFs mentioned. I like the picks….thanks for sharing.
R2R
That’s great, happy it helps.
Thanks for sharing this list! Finding low-cost ETFs is something that’s important to me. And, having worked in healthcare for a couple of years, I can tell you that the healthcare ETFs definitely make a lot of sense – productivity is becoming a key focus, meaning higher returns will be inevitable in the future (even if hospitals have more risk with insuring their patients).
Also, do you have any blog posts about the international investing you mentioned on my blog? If so, send me an email with links. I’d love to look into that more.
Hi Rob,
I would love to learn more about healthcare companies as an insider like you. I believe they are great investments for the next decade. The part I need help with is the biotech-healthcare sector. Traditional healthcare is very profitable, but biotech will be in your opinion?
To start investing internationally, I have prepared a short step by step guide that will help you to open a broker account in Hong Kong and start to trade.
If you need any more info, feel free to contact me.