Since the summertime lows, a number of themes have gained enormous traction. U.S. real estate is benefiting from ultra-low mortgage rates, limited supply and remarkable demand from overseas buyers. Chinese leadership continues to provide just enough government support to maintain economic targets. And the European Central Bank (ECB) is having success at containing its sovereign debt woes, in spite of the region’s deepening recession.
Investors that engaged the trends early have profited immensely from price appreciation in certain ETFs. Since June, for example, the iShares DJ Home Construction Fund (ITB) has had little difficulty soaring skyward on the notion that a genuine real estate renaissance is in progress.
However, if fiscal cliff concerns elevate as 2012 draws to a close, you may see investors with large capital gains in the sector take profits. Apple shareholders have witnessed this activity for more than a month.
It follows that the price of ITB may revert to its mean, or 200-day exponential moving average. That’s close to 14% drop from present levels. Moreover, we typically think of assets that are 10% above critical trendlines as being “overbought.”
None of these circumstances alter the big picture theme that real estate may finally be getting out of the dog house. Are there ETF alternatives, then, for profiting from increases in home construction?
I suggest that investors intrigued by property prospects look at global timber companies. Guggenheim Global Timber (CUT) or iShares Global Timber and Forestry (WOOD) both have strong weightings in a personal REIT favorite, Plum Creek Timber (PCL), as well as worldwide forest products manufacturer, Weyerhaeuser (WY). That said, iShares Global Timber and Forestry (WOOD) has a lower expense ratio (0.48%) than CUT (0.65%); WOOD is currently 8.5% above its 200-day EMA.
An unflappable ETF throughout most of 2012 has been iShares MSCI Philippines (EPHE). Its year-to-date success is partially attributable to 5% appreciation in the country’s currency as well as the country’s enviable debt-to-GDP ratio of 50%. Moreover, credit agencies from S&P to Moody’s upgraded the Philippines sovereign bonds in the summer. Perhaps most importantly, trade with China has skyrocketed, expected to hit $30 billion by year-end.
On the other hand, herd mentality has pushed EPHE to all-time highs and nearly 16% above a critical moving average. It’s hard to imagine a scenario where EPHE does not experience a near-term 10% pullback.
In my estimation, there are better values in funds like iShares MSCI Singapore (EWS) and iShares MSCI Malaysia (EWM). Both have more attractive P/Es, significantly better annual yields (3.6%) and vibrant trade relations throughout the Asia Pacific region. Additionally, neither EWM nor EWS are technically “overbought.”
There’s a feeling by some of the investment community that the European Monetary Union may finally be getting itself out of its 3-year nightmare. This has benefited some of the more financially responsible members of the alliance such as Germany and Austria. German stocks have recently hit 4-year highs, while iShares Austria (EWO) has amassed a staggering 33% since its late July bottom. It also rests in overbought territory… more than 11% above its trendline.
I might be confident that a number of European multinationals — SAP, Sanofi, Louis Vuitton — can ultimately thrive. On the other hand, the strong possibility of sharp declines in the euro lead me to a dollar-hedged alternative.
Enter WisdomTree Europe Hedged Equity (HEDJ). Not only does it hedge against potential declines in the euro, it provides diversification across leading corporations throughout Europe. Equally beneficial, HEDJ has its greatest exposure in consumer staples and consumer discretionary, where names like Bayer, Unilever and Anheuser Busch have an impressive worldwide footprint.
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