Investors seem to be a bit short of options these days.
Stocks are trading on stretched valuations, implying lower future returns. Bond yields are in the low single digits. Cash provides no return worth speaking of. What’s an ETF investor in 2020 to do?
Below are some ideas for the 2020 calendar year.
Real estate ETFs
For me, the most interesting ETF opportunity for 2020 is in property. And in particular, it’s in good old real estate investment trusts, or REITs.
REITs are usually thought to be boring and for old people. Because they’re unsexy they get basically zero press. Finance professionals are taught to think of them as bond proxies and market them to the same type of yield-loving conservative investor that likes bonds.
Source: S&P Global
They got something of a bad reputation after the financial crisis because they binged on debt at precisely the wrong moment. Some of their share prices have never recovered to 2007 levels.
The stigma is a bit of shame, as the past 10 years REITs have very comfortably outperformed the broad stock market in most countries – and by a large margin in Australia and Canada.
To my mind, 2020 could be another good year for REITs. And for textbook reasons: interest rates will keep falling.
Source: S&P Global
Gold ETFs
Gold has no cash flows. This means it is not for everyone.
Gold’s detractors include high profile investors like Warren Buffett and Jack Bogle, who one hesitates to contradict. They warn that as gold has no internal rate of return, you’re basically betting someone will buy it off you for a higher price than you bought it for. This, they argue, is speculation - not investing.
Be that as it may, gold has been a store of value for millennia. From the ancient Egyptian to the Ming Dynasty to the British Empire to Fort Knox – gold has always managed to find buyers. There seems to be something in human nature that just finds gold valuable.
Why gold for 2020? As we all know, gold likes bad news. When asset prices tank across the board, the one thing that rises is the gold price. For this reason, gold is an effective diversifier. As Michael Batnick, Ritholtz Wealth's director of research has show, adding a small allocation to gold gives investors a similar level of return to a blended equity-bond portfolio. Only at less risk.
Source: Michael Batnick; 60/40 portfolio versus 40/40/20, where 20% is in Gold.
For my part, I get the impression there will be more difficult political news in 2020, which is a US presidential election year. I suspect gold has more room to rise.
Smaller companies
A lot of people try and figure out how to trade politics. Most fail, meaning that political trades have the reputation for being a mugs game.
Nonetheless, one of the best attempts I’ve seen at decoding the current political climate is from Gervais Williams, the British fund manager.
Williams argues that Trump and Trump-like populists are going to mean that economies become more locally-focussed and corporatist. This, he argues, will be good for smaller companies which make more of their revenue at home. (Williams runs a UK small companies fund, which has massively underperformed. So he’s not impartial).
Source: Google Finance; over the past 20 years iShares small cap ETF has beaten its large cap ETF
Adding to this the fact that historically smaller companies have outperformed, and you have a pretty compelling thesis for smaller companies.
Nonetheless, the past few years larger companies have felt all the love. Large businesses, led by the US tech giants, have left smaller businesses a long way behind.
However 2020 might be the year that changes. Investors are running out of patience with growth companies valuations and Trump will probably win a second term.
