Last year marked another stellar 12 months across all asset classes with geopolitical risks doing little to hamper the record-breaking bull market in equities, however, investors will be acutely aware this cannot last forever.
As we enter a new decade, here is a selection of ETFs investors should consider for the different market environments they may face in 2020.
European equities have more attractive valuations compared to North America and emerging markets, according to State Street Global Advisors (SSGA).
However, the firm remain relatively neutral on the exposure due to persistent political uncertainty regarding Brexit and a trade war with the US which is looking to introduce a tariff on car exports.
More attractive regions that could see growth in 2020 are emerging markets although investors will need to wait for a couple of catalysts to initialise this momentum.
These catalysts include flows into emerging markets as benchmarks expand, an end to US-China trade tensions and GDP growth due to structural reform.
The Lyxor MSCI Emerging Markets ex-China UCITS ETF (EMXC:LN) offers exposure to the emerging market but excludes Chinese equities which will likely be affected by the ongoing trade war discussions.
EMXC comes with an annual fee of 0.30% and is the first and only of its kind in Europe. In the US, the iShares MSCI Emerging Markets ex China ETF (EMXC:US) is 19bps more expensive and tracks the same index.
Alternatively, for investors bullish towards China’s continued growth, emerging market ETFs that include China come with a cheaper fee but a more concentrated exposure.
The iShares Core MSCI EM IMI UCITS ETF USD (EMIM) offers broad exposure to the market and at a fee of only 0.18%. With over $15bn in assets under management, EMIM should be more liquid and its spreads should minimal meaning it is easier to trade.
It is worth highlighting though that nearly a third (31.7%) of the fund is exposed to China with the next highest exposure being Taiwan with 12.5%. Alibaba alone accounts for 5.1% of the fund and even though its share price climbed 55.2% in 2019, it is significantly impacted by events regarding the trade war. When US President Donald Trump increased tariffs on Chinese goods from 10% to 25% in May, Alibaba’s share price fell 23.5% over the course of the month.
While low and negative interest rates took the headlines in 2019, fixed income investors are forecasting this structural condition to continue in 2020.
Central banks are expected to implement policy rate moves or quantitative easing. This will benefit corporate bond holders from investment grade to high yield although SSGA will maintain a defensive position and move away from lower-grade credit such as CCC-rated bonds.
The iShares Core £ Corporate Bonds UCITS ETF (SLXX) is comprised of investment grade bonds issued by large companies but not necessarily ones that are based in the UK. SLXX comes with an ongoing charge of 0.2% and a slightly higher level of risk than gilts or treasuries.
Additionally, SSGA forecasts emerging market debt will hold long term growth and income potential for investors on top of emerging market equities. This is a result of dovish US federal reserve and European Central Bank policies that will likely provide flexibility for emerging market policymakers.
Two ETFs that will provide adequate exposure to these benefits include the Vanguard USD Emerging Markets Government Bond UCITS ETF (VEMT) which offers exposure to low risk debt in emerging markets. Being Vanguard, it comes with a cheap fee of 0.25% and has $530m in AUM. In 2019, it offered a return of 9.7% which is appropriate for its level of risk.
Secondly, the iShares JP Morgan $ EM Bond UCITS ETF (SEMB) is slightly more high risk but does not include any CCC rated bonds that SSGA suggests. As well as including emerging market government bonds, it also is comprised of investment grade and high yield bonds which typically carry a credit rating of BBB or higher.
SEMB comes with a higher fee of 0.45% but does have significantly more assets under management at $10.2bn and an average spread of 0.2%. While it is 20bps more expensive than VEMT, the performance was 105bps greater last year and could be even higher in 2020 if emerging market debt performs as expected.
Commodity ETPs have seen significantly large inflows in 2019 and as investors continue their defensive stance against geopolitical events, more assets are expected to flow into the safe havens such as gold ETPs, according to WisdomTree.
Central bank purchasing of gold was at its highest in 2018 with 650 tonnes but is expected to be greater in 2019 after a high volume in H1.
There are several physically backed gold ETPs with similar structure and fees. If it’s price and value that takes preference, the WisdomTree Physical Swiss Gold ETC (SGBS) is the cheapest product of its type in Europe by 5bps at 0.19%.
Amundi does have a similar product at an identical price, the Amundi Physical Gold ETC (GOLD:FP), with $1.1bn in assets that it has accumulated in just over six months. However, the product is listed on Euronext Paris, Euronext Amsterdam and Deutsche Boerse, with marketing distribution rights for only Austria, Germany, France, Netherlands, Sweden.
The gold is stored in Zurich on behalf of the custodian JP Morgan Chase Bank. With $2.7bn in AUM, an average spread of 0.05% and offered a return of 18.4% in 2019, it is a liquid and strong performing product that offers investors protection amid volatile markets.