Jeremy Glaser: I'm Jeremy Glaser with Morningstar.com. It's Ideas Week, and here to discuss the best and worst picks for ETFs is director of ETF Analysis, Scott Burns. Scott, thanks for joining me.
Scott Burns: Thanks for having me, Jeremy.
Glaser: So investors who are looking to make an ETF play in 2010, what do you think some of their best ideas would be?
Burns: Well, we've got a couple themes for you here. The first is something we've actually talked about a few times, both in print and in video on Morningstar.com, and that's medical devices. We've seen some appreciation in the iShares US Medical Devices Index, and that ticker is IHI. But actually we think that's just confirmation on our thesis.
We think there's still a lot of room to run, and even with all the controversy surrounding health care right now, we think the growth prospects in that space, and really the impact that any change coming out of Congress or the president's office will have, will be actually be very minimal on this space. So IHI we think is still prime for a nice start to 2010.
Glaser: So you think that makes more sense than looking at managed health care or big pharma or other places in health care?
Burns: Yeah. The risks in those are multiple, both from a legislative impact, and also actually really from a growth impact. So when you just kind of think about what the big pharma pipelines look like, I do think they're great valuations. But for us when we look at it, our preferred choice right now is medical devices.Read Full Transcript
Glaser: OK. What's another idea for people?
Burns: So, switching from a U.S. domestic sector idea, one of the things that we've been taking a look at is some of these emerging markets or just international funds out there, and we actually think one of our best picks right now is iShares MSCI South Korea.
South Korea, although it's had a really nice rebound here in 2009, is actually still trading at the same levels it was about 2006. So South Korea has actually lagged the general market recovery, and there is some debate about South Korea as to whether it's emerging market or developed market. And everybody but MSCI seems to have recognized that it's a developed market.
But what we really like about South Korea is that, one, the South Korean consumer is in really good shape right now. There wasn't a lot of leverage there. Two, the U.S. consumer is in better shape, so that's happening. We don't expect it to be gangbusters, but we expect people to start buying Samsung phones and LG refrigerators again and not have the total drop-off that we saw.
And third, actually, it's the Chinese consumer, and that's really the growth engine there. South Korea has got a great brand in China. It's right across the Sea of China from China. [laughs] I'll keep saying China a few more times. So they're really poised to capitalize on that growth of the Chinese domestic consumer.
And they do have some competition there from local Chinese products, but they've had so far a lot of success penetrating the China market, and we just really think that iShares MSCI South Korea, and the ticker on that is EWY, is really poised to have a nice 2010.
Glaser: So speaking of Samsung and LG, that does make up a really large part of that index, right?
Burns: Oh, it's definitely a very top-heavy index, but that's actually true with most of these single-country ETFs that we look at. There's always these large either industrial conglomerates or former privatized government institutions that sit at the top. So one thing any ETF investor wants to look at is to be aware.
Unfortunately, there isn't a small cap South Korea index out there, otherwise we'd recommend it. But one of the things we like about South Korea is that emerging markets in general have had a tremendous run in '09, have recovered most of what they lost at the end of '08.
I think Brazil is up 120% year to date, and South Korea, like I said, it's done well, but it's lagged a little bit. So we still think there's a little powder in that keg.
Glaser: So now, what are some things that an ETF investor might want to avoid?
Burns: Well, one thing that we are definitely avoiding right now is treasuries. And included in that would be the large aggregate bond ETFs, so things like Vanguard Total Bond--ticker BND--or iShares BarCap Aggregate Bond, with the ticker AGG.
We recently swapped AGG out of our Hands-Free model portfolio that's in the ETF Investor Newsletter and kind of disaggregated it and moved more into corporate bonds and foreign denominated TIPS bonds and also U.S. domestic TIPS bonds. But right now Treasury yields are ridiculously low.
There's basically been a couple points in time over the past week where we've seen zero real interest rates, just kind of an inflation premium in there. So even if we had an economic collapse, we'd have to have negative interest rates for bond prices to go up anymore. So we do think in asset allocation that you should have some Treasuries.We recommend TIPS.
We don't recommend TIPS, like back up the truck and tactically advance, but TIPS over Treasuries, corporates over Treasuries also right now. So definitely avoid the treasury ETFs and included in that we think the aggregate bond ETFs.
Glaser: So if we're looking to not be in Treasuries or bonds, what would be a place that we could put some money that we want to keep maybe a little bit more stable?
Burns: Yeah, right now in this zero-yield environment, we're looking for yield and it's really tough to find. But one place we found, and I will say to our own credit, we actually discovered it before Bill Gross said that he liked it too, is utilities. We like the Select SPDR Utilities ETF, ticker XLU.
The utility companies right now, their dividend yields are actually higher than their bond yields, and that's always a nice sign to buy right there. There is some cap and trade risk and some other things out there, but we think that's more than priced in. We think as we see some industrial recovery, again we're not looking for gangbuster, but off the deck basically. No more heart attack in the industrial sector.
We're going to see these electricity rates regain. We're also going to see some emerging gen. So we think utilities right now are the best bet for investors looking for yields. And not only that, you get some inflation protection, because if there is inflation, it's most likely going to come from our energy costs.
The way utilities are structured, they pass those costs through. Those yields will hopefully be able to maintain themselves and keep you ahead of inflation, definitely a lot better than treasuries will right now.
Glaser: That's some solid advice, Scott. Thanks for talking with me.