ETF Watchlist: Week of October 30, 2017

One sure sign of investor over-optimism is when you start hearing bombastic declarations from some of the industry’s biggest names. For example, we saw Jim Paulson’s statement a few months ago that “the bull market could continue forever”. Common sense should tell us that this won’t be the case, but the headlines seem to continue. This week, it was noted value investor David Einhorn’s turn at the mic. He questioned whether or not value investing is a “viable strategy” going forward. Granted, the value style of investing has been out of favor for some time as growth names such as Amazon (AMZN), Facebook (FB) and Tesla (TSLA) continue plowing to new highs. But does that mean it’s no longer viable at all?

Spoiler alert: Value investing is NOT dead.

It’s easy to think why it might be though. Growth stocks tend to outperform when the economy is good or recovering. People are willing to accept more risk in the hopes of greater returns. We’ve had nine straight years of positive returns in the equities markets with barely a 10% correction along the way. Interest rates and volatility are low. All the pieces are in place for growth stocks to do well.

But that won’t be the case forever. Inevitably, the markets will drop again. Those growth names which have done so well over the past several years could be the first pins to drop if the economy starts to slow. Investors suddenly won’t be so willing to pay rich premiums on hot tech names. Value stocks may appear boring, but they also tend to be more conservative, pay higher dividends and have some downside protection built in. Those characteristics become attractive in less certain environments. We may not be in one of those right now, but we will at some point again.

Here are your four ETFs to watch in the coming week (note: it’s purely coincidental that they all happen to be iShares ETFs).

iShares U.S. Technology ETF (IYW)

The tech sector has been hot this year. A little more gasoline was poured on the fire last week as Amazon, Alphabet (GOOG), Microsoft (MSFT) and, heck, even Twitter (TWTR) saw their stocks trade sharply higher following quarterly earnings reports. Apple (AAPL), Facebook and Qualcomm (QCOM) all report this week and make up roughly 30% of the U.S. Technology ETF’s assets. Could a similar rip be in the offing?

Others: Technology Select Sector SPDR ETF (XLK), Vanguard Information Technology ETF (VGT), First Trust Nasdaq 100 Technology ETF (QTEC)

iShares Barclays 1-3 Year Treasury Bond ETF (SHY)

Treasuries look to be under pressure as yields continue to rise. The 2-year Treasury yield is up above 1.6%, the highest it’s been at since the 2nd half of 2008. Treasuries could move further this week depending upon the announcement of a new Fed chair as early as this week. The European Central Bank announcing that it will be reducing fiscal stimulus could also weigh on yields.

Others: iShares U.S. Treasury Bond ETF (GOVT), Vanguard Short Term Government Bond ETF (VGSH), Schwab Short Term U.S. Treasury ETF (SCHO), iShares 3-7 Year Treasury Bond ETF (IEI)

iShares MSCI Spain Capped ETF (EWP)

The Catalonian Parliament voted to declare independence from Spain last week, further fueling the divisiveness and unrest in Spain. The Spain Capped ETF is still up more than 20% on the year, but is now drifting off of its 2017 highs. It’s unlikely that we’ll see the type of reaction in Spain that we did to Brexit, but it’s still worth keeping an eye on.

Others: iShares Currency Hedged MSCI Spain ETF (HEWP)

iShares Core Dividend Growth ETF (DGRO)

Let’s not forget that Washington is scheduled to unveil its latest tax reform proposal this week. Companies are optimistic that a cut in the corporate tax rate will be a boon for business (although a recent rumor suggested that the tax rate could be lowered over a period of several years instead of all at once). Some of that extra cash will likely show up in investors’ pockets in the form of higher dividends. The Core Dividend Growth ETF focuses on companies that steadily grow their dividends, and could do well if tax reform were to pass.

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