The month of December is meaningful for investors in many ways. After an unsuccessful constitutional referendum in Italy, the month is highly likely to see the sole Fed rate hike of this year and will continue to mull over how effective and prolonged the Trump rally will be in the U.S. market (read: Confident About Trump Rally? Play These Small-Cap Blend ETFs).
Investors should note thatthe Italian prime minister Matteo Renzi lost the referendum – arranged on December 4 – by a wide margin, as about 60% voters went against “streamlining the 68-year-old parliamentary system”, intended at boosting the country’s ailing economy. At the current level, Renzi has agreed to continue his role until the Senate passes its 2017 budget in the coming days.
With this, market watchers expect political uncertainty and the likelihood of an early election in Italy. The anti-referendum movement was led by the anti-establishment Five Star Movement party commanded by Beppe Grillo. And if Grillo wins in an early election, he might dump euro, reintroduce the Italian lira and call for a situation like Brexit (read: UK Votes for Brexit: ETFs Winners & Losers).
Asset Classes Losers
Such a threat was strong enough to send the common currency Euro to a 20-month low, just after the result of the referendum though it steadied later. Such an event put CurrencyShares Euro ETF (FXE - Free Report) in focus along with the pureplay Italy ETF iShares MSCI Italy Capped (EWI - Free Report) . If Euro crumbles further, it would be prudent to go short on euro ETFs. Investors can short euro with ProShares UltraShort Euro (EUO - Free Report) (read: Short the Euro with These ETFs).
Coming to inverse equity exposure, investors can play ProShares Short MSCI EAFE (EFZ - Free Report) which offers negative exposure to the daily performance of the MSCI EAFE Index. Notably, the index has over 60% exposure to European stocks.
Though investors have not yet reacted that negatively to the defeat of the Italian government as evident from 0.8% gains in EWI on December 5, the coming days could be choppy. Already, shares of Italian banks took a hit on the vote.
Global markets also stayed stable with all-world ETF iShares MSCI ACWI (ACWI - Free Report) adding 0.7% on December 5, the U.S. gauge SPDR S&P 500 ETF (SPY) advancing 0.6% and Europe ETF Vanguard FTSE Europe ETF (VGK) tacking on 1.55% gains.
Notably, this year's fastest growth rate in Euro zone business activity in November explains VGK’s unexpected gains that ignored the likely threats from the Italian referendum. Analysts are of view that investors may have probably taken Italian risks lightly as nothing horrid is less likely to happen in the near term.
Still, investors not wanting to expose themselves to market risks may choose to play quality ETFs. This is especially true given the likely Fed rate hike this month and probable talks of faster policy tightening which may cause a crash in global markets. Below we highlight a few quality ETF options.
Quality ETFs in Focus
iShares Edge MSCI International Quality Factor ETF (IQLT - Free Report)
The 285-stock fund gives exposure to large- and mid-cap developed international stocks with positive fundamentals like high return on equity, steady year-over-year earnings growth and low financial leverage. No stock accounts for more than 3.47% of the portfolio.
The $19.35-million fund is heavy on UK (19.36%), Switzerland (13.3%) and Japan (12.45%). France (8.85%), Germany (8.36%) and Canada (8.15%) round out the next three spots. Financials (22.82%) is the top sector of the fund followed by Industrials (13.83%) and Consumer Discretionary (11.68%). It charges 30 bps in fees.
WisdomTree International Hedged Quality Dividend Growth Fund (IHDG - Free Report)
With the Fed preparing for policy tightening in the near term and most other developed economies pursuing easy money policies, a currency-hedged approach would be intriguing to set off the effect of a surging greenback.
IHDG serves this purpose. Moreover, IHDG takes care of investors’ income as the fund selects dividend-paying companies with growth features in the developed world ex U.S. and Canada. This Zacks ETF Rank #3 (Hold) ETF charges 58 bps in fees. UK (18.54%), Switzerland (11.96%), Japan (11.33%) and the Netherlands (11.02%) take the first four positions in the fund (see all Broad Developed World ETFs here).
FlexShares Quality Dividend ETF (QDF - Free Report)
Investors fearing the spillover of the Italian referendum debacle to the U.S. shore can consider this U.S. quality ETF too. QDF here uses a proprietary model that includes factors like profitability, management efficiency and cash flow. The fund looks to provide exposure to the growth potential of U.S. securities that offer dividends as well. The fund yields 2.93% annually while it charges 37 bps in fees (read: Trump Rally to Wane? Buy These Quality ETFs).
VanEck Vectors Morningstar Intl Moat ETF(MOTI - Free Report)
The fund gives exposure to global quality stocks that Morningstar believes have sustainable competitive advantages. Australia (20.9%), China (12.4%) and Singapore (9.6%) get considerable focus in the fund. The 75-stock fund charges 56 bps in fees.
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