Rising rates, global trade disputes, and other geopolitical developments continue to change the dynamic for investors. If you haven't done so already, the midpoint of the year can be a good time to reflect on your investment mix.
If you are interested in exchange-traded funds (ETFs), one tool that may be of use is Fidelity's ETF screener that can quickly sort through a lot of data based on choices you make, to help you identify specific investments. You can search for ETFs using a variety of characteristics like the funds' objectives, fundamentals, technicals, performance, volatility, trading characteristics, tax considerations, and analyst ratings.
Below, we feature 3 examples of ETF screens that you might consider running, in light of recent market developments, plus the top results for each.
1. Sector ETFs
Second-quarter 2018 earnings reporting season began in July. According to S&P Capital IQ, consensus estimates are calling for 8 of the 11 US sectors to see double digit year-over-year earnings per share gains (9 of the 11 sectors are expected to have positive growth), led by energy, materials, financials, and technology, while real estate and utilities are expected to report declines (see table below).
If you want to explore sector ETFs for those sectors that consensus estimates forecast to have the largest EPS gains during this earnings season using the Fidelity.com ETF screener, select objectives, equity, sector, energy, materials, financials, information technology. If you want to search for the largest ETFs in these sectors, select basic ETF/ETP facts, net assets, very high. You might also consider adding additional criteria. For example, value, using price-to-cash flow by selecting fundamentals, equity, low price/cash flow.
As of July 10, 2018, the top 10 results of this sample screen, sorted by net assets, were:
- Financial Select Sector SPDR Fund (XLF)
- Financial Select Technology SPDR Fund (XLK)
- Vanguard Information Technology ETF (VGT)
- Energy Select Sector SPDR Fund (XLE)
- Alerian MLP ETF (AMLP)
- First Trust Dow Jones Internet Index (FDN)
- Vaneck Vectors Gold Miners Index ETF (GDX)
- Vanguard Financials ETF (VFH)
- SPDR S&P Regional Banking ETF (KRE)
- Vaneck Vectors Junior Gold Miners Index (GDXJ)
2. Bond ETFs
The major news from the Fed's June 13 meeting was another 0.25% increase in the fed funds rate (this rate is the key interest rate set by the US central bank, which influences most other domestic interest rates), marking the seventh such rate increase since 2015. The rate hike was widely expected; indeed, prior to the announcement, fed funds futures were forecasting a 100% probability of a 0.25% increase. This benchmark rate now stands between 1.75% and 2.00%.
The Fed's dot plot, which reveals expectations of FOMC voting members, indicates 2 more rate hikes are coming this year. Tom DeMarco, CFA®, a market strategist in Fidelity Capital Markets' fixed income division, thinks 2 more rate hikes are likely this year as well. He also thinks that we're closer to the end of the rate-hike cycle than we are to the beginning. "Real interest rates, which are adjusted for the rate of inflation, remain low by long-term historical standards," DeMarco says.
In terms of the segments of the bond market that DeMarco likes right now, he points to municipal bonds as one option. "Generally speaking, muni bond fundamentals look fine, with solid economic growth and healthy tax collections (see chart below). So I think munis will continue to hold their own, especially through the technically strong summer months."
If you'd like to look for municipal bond ETF ideas using the screener, select fixed income, US municipal. The largest 10 US municipal bond ETFs, sorted by net assets, as of July 10, 2018, were:
- iShares National AMT-Free Muni Bond ETF (MUB)—available for purchase commission-free on Fidelity.com
- SPDR Barclays Short Term Municipal Bond (SHM)
- Vanguard Tax-Exempt Bond Index ETF (VTEB)
- Invesco National AMT-Free Municipal Bond ETF (PZA)
- Vaneck Vectors AMT-Free Intermediate Municipal Index ETF (ITM)
- iShares S&P Short Term National AMT-Free Bond ETF (SUB)—available for purchase commission-free on Fidelity.com
- iShares California Muni Bond ETF (CMF)
- Invesco Taxable Municipal Bond ETF (BAB)
- SPDR Nuveen S&P High Yield Municipal Bond ETF (HYMB)
- First Trust Managed Municipal ETF (FMB)
Of course, more research is needed to determine if any of these ETFs are appropriate for your situation. This screen generated a wide range of types of ETFs, including state munis, high-yield munis, and AMT-free munis. Just because they are municipal securities does not mean they have low investment risk.
3. International ETFs
As central banks around the world continue to adjust policy and the trade dispute saga plays out, among other economic developments, you may want to monitor your portfolio to ensure that your strategic asset allocation is not out of balance with your objectives. Pay special attention to your long-term asset allocation targets. Some investors may want to ensure portfolio diversification that includes international equities.
If you’d like to explore international ETFs to complement your investment portfolio via the ETF screener, select geography objective, international (ex-US). You may also choose to look for those with high net assets and add in some fundamental filters by selecting fundamentals, equity, high cash flow growth %.
As of July 10, 2018, the top 10 results of this sample screen, sorted by net assets, were:
- Vanguard FTSE Developed Markets ETF (VEA)
- Vanguard FTSE All-World Ex-US ETF (VEU)
- iShares Core MSCI Total International Stock ETF (IXUS)—available for purchase commission-free on Fidelity.com
- iShares MSCI EAFE Value ETF (EFV)—available for purchase commission-free on Fidelity.com
- iShares International Select Dividend ETF (IDV)
- Schwab Fundamental International Large Company Index ETF (FNDF)
- iShares Currency Hedged MSCI EAFE ETF (HEFA)
- SPDR Portfolio World Ex-US ETF (SPDW)
- Schwab Fundamental International Small Company Index ETF (FNDC)
- WisdomTree International Smallcap Dividend (DLS)
As with any other screen, more research is needed to determine if any of these ETFs are right for your specific investing strategy. It should be noted that some international ETFs have more investment risk and more potential volatility than broadly diversified ETFs.
If you think one or more of the ETFs identified by a screen is one you want to consider to help manage the risk in your portfolio or achieve your objectives, your next step should be to research it further.
The results of the international screen, in particular, are worth examining in more detail. For instance, international investing involves more risk, and the results of this screen feature lower liquidity relative to other, more widely held ETFs. Further research will help you better understand what you are buying.
Also, trading costs are among the many factors that you should analyze when considering an ETF. Factoring in the impact of commissions, for example, can be particularly relevant for active investors who trade somewhat frequently—especially if you are making relatively small-sized trades—as well as long-term investors executing a dollar cost averaging strategy.
In addition to commissions, a few other key factors to consider for any ETF (which you can find on Fidelity.com, on an ETF’s snapshot page) are:
- Expense ratio: Look for low expense ratios to reduce your overall costs.
- Bid-ask spread: Look for small bid-ask spreads to reduce costs of investing.
- Tracking error: Look for a low tracking error to find ETFs that indicate a better job of replicating their benchmark indexes.
If you find ETFs with similar objectives, you could compare their expense ratios, bid-ask spreads, and/or tracking error to find the better deal. You can filter for all of these factors using the ETF screener.
Knowing what the individual components of an ETF are can also give you a better sense of what you are buying or selling. You can find an ETF’s components on its ETF snapshot page on Fidelity.com, under Portfolio Composition. On this page, you can find the ETF’s style (value, growth, or blend) and size (large, mid, or small), as well as analyst ratings and key statistics.
Finally, you should fully understand the risks involved in any investment strategy. Any investing opportunity should be considered within the context of a well-diversified investment strategy that conforms to your specific time horizon, objectives, and risk parameters.
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As with all your investments through Fidelity, you must make your own determination whether an investment in any particular security or securities is consistent with your investment objectives, risk tolerance, financial situation, and evaluation of the security. Fidelity is not recommending or endorsing this investment by making it available to its customers.
Exchange-traded products (ETPs) are subject to market volatility and the risks of their underlying securities, which may include the risks associated with investing in smaller companies, foreign securities, commodities, and fixed income investments. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks, all of which are magnified in emerging markets. ETPs that target a small universe of securities, such as a specific region or market sector, are generally subject to greater market volatility, as well as to the specific risks associated with that sector, region, or other focus. ETPs that use derivatives, leverage, or complex investment strategies are subject to additional risks. The return of an index ETP is usually different from that of the index it tracks because of fees, expenses, and tracking error. An ETP may trade at a premium or discount to its net asset value (NAV) (or indicative value in the case of exchange-traded notes). The degree of liquidity can vary significantly from one ETP to another and losses may be magnified if no liquid market exists for the ETP's shares when attempting to sell them. Each ETP has a unique risk profile, detailed in its prospectus, offering circular, or similar material, which should be considered carefully when making investment decisions.
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