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The 2014 ETF giveaway – 6 chances to win…

Pathfinder is kicking off 2014 with a light hearted “competition” for AFAs – join in by sharing your picks for the best ETF performers over the year ahead.  The six advisers choosing the best performing country or sector equity ETFs will be rewarded with a fine bottle of Pinot Noir!

Monday, January 13th 2014, 12:20PM

by Pathfinder Asset Management

1. 2013: country and regional performance

2013 was an impressive year for equities.  The US$5 billion exchange traded fund (ETF) covering the MSCI All Country World Index was up 23% (in US$ terms).  Not a bad outcome for a passive holding in broad global markets.  The year saw a range of high performing markets:

Country ETF Ticker Expense ratio ETF Size 2013 return
US (S&P 500) SPY 0.09% US$174 billion 24%
Germany EWG 0.51% US$6 billion 30%
Spain EWP 0.52% US$1 billion 31%
Ireland EIRL 0.51% US$123 million 45%
Japan EWJ 0.51% US$14 billion 24%

Europe performed solidly - the European regional ETF (ticker VGK) was up 20%.  Even recent disaster zones like Greece and Ireland did well. In fact developed markets generally had a great 2013 with a few exceptions (such as Canada and Australia).

There was a wide selection of laggards in 2013 – in very general terms the BRICs and wider emerging markets did not have a happy year.  The very popular US$46 billion emerging markets ETF (ticker VWO) was down 5% for 2013.  Here is a selection of 2013’s under-achievers:

Country ETF Ticker Expense ratio ETF size 2013 return
China FXI 0.72% US $5 billion -3%
Brazil EWZ 0.60% US $4 billion -18%
Singapore EWS 0.52% US $1 billion -1%
Russia RSX 0.62% US $1 billion -2%
Mexico EWW 0.52% US $2 billion -2%

2. 2013: sector and industry returns

Taking a more granular investment view, ETFs can provide very cheap sector, industry or factor exposures to the US market.  As the US is around half of the world’s market cap, this provides a useful entry point for expressing investment views. (Note that it is also possible to get sector ETFs outside the US market but, with a few exceptions, they are typically more expensive).

Below we show some sector winners for 2013:

Industry ETF Ticker Expense ratio ETF size 2013 return
Healthcare XLV 0.18% US $8 billion 41%
Consumer Disc XLY 0.18% US $7 billion 42%
Biotech IBB 0.48% US $4 billion 65%
Regional banking KRE 0.35% US $3 billion 47%
Industrials IYJ 0.48% US $1 billion 41%
Pharmaceuticals XPH 0.35% US $700 million 57%
Solar TAN 0.65% US $640 million 128%

2013 proved to be a very healthy year for investors in US stocks.  In fact it is a struggle to find US sectors that performed poorly through 2013 – here are a handful: 

Industry ETF Ticker Expense ratio ETF size 2013 return
Gold miners GDX 0.52% US $4 billion -55%
Metals and mining XME 0.35% US $560 million -6%
Utilities XLU 0.18% US $5 billion 13%

In our view 2014 is shaping up positively for global equities.  We see valuations as generally “elevated” but not “stretched” - we do not believe equity markets have entered bubble territory. A “business as usual” approach for investors (i.e. no unexpected shocks) should deliver a favourable environment for the year ahead.

3. Here’s how the competition works….

To kick off the New Year we encourage advisers to share their views on markets and sectors that they expect will perform well over 2014.  We are offering 3 bottles of wine for the best performing country/region equity ETF picks and 3 bottles for the best sector/industry/factor equity ETFs.  Picks are welcome from everyone, though you must be an AFA to collect a prize (and for all you investment geniuses out there, sorry but there is only one prize per person!). 

Please fill in the comments section below with your name and firm along with your picks (ETFs must be identified by their ticker). Feel free to add a comment on why you back that view – all picks must be posted within 2 weeks of this article being published.  Eligible ETFs must meet what we regard as sensible ground rules for ETF investing, namely:

  1. No short or leveraged ETFs
  2. US listing and market cap of at least US$500 million
  3. The ETF must own the underlying stocks (and not gain exposure through derivative contracts)

To get the ball rolling Paul and I set out our picks below:

  ETF Why?
John Country - Japan (DXJ: US$12 bln ETF) Japan’s lost decades of deflation and no growth are quite possibly over. A combination of corporate earnings growth and aggressive monetary policy should send the Nikkei higher and Yen lower (the DXJ ETF is currency hedged).  Ignoring Japan’s long term debt and demographic issues, we remain positive about its short run outlook.
  Sector – Financials
(XLF: US$17 bln ETF)
The environment for beaten up financial stocks has turned the corner.  After a positive performance in 2013, the sector remains at about half its pre-GFC peak.  Restructured and repaired balance sheets coupled with US GDP growth will support these stocks.
Paul Country – Germany
(EWG: US$6 bln ETF)
With Japan already taken, look to Germany as it continues to benefit from the structural productivity advantage it has from the Euro currency.  As the world’s third largest exporter (just behind China and the US), Germany will benefit from the expected uptick in global growth.  Forward P/E of the German market is a relatively low 12.5 times earnings, and expected earnings growth of around 15% bodes well.
  Sector – Technology
(XLK: US$13 bln ETF)
Companies – particularly in the US – have underspent on CAPEX since the GFC.  With growth returning to higher levels companies are likely to spend more on productivity enhancing technology.  Also expect corporate migration to “the Cloud” to accelerate in 2014 (with the share of corporate computing workload on the cloud increasing from 10% to 17%).

 A progress report on the ETF “competition” will be published mid-year followed by the final result in 12 months’ time.  Just to be clear, this is intended as a bit of fun so we won’t be humiliating anyone whose picks turn bad!  Anonymous picks can’t win but are also welcome. 

Whether ETFs are or aren’t your thing, we wish you all the best for investing over the year ahead.


John Berry
Executive Director
Pathfinder Asset Management Limited


Pathfinder is a fund manager and does not give financial advice. Seek professional investment and tax advice before making investment decisions.

Pathfinder is an independent boutique fund manager based in Auckland. We value transparency, social responsibility and aligning interests with our investors. We are also advocates of reducing the complexity of investment products for NZ investors. www.pfam.co.nz

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