Eight ETFs to Watch in December

Eight ETFs To Watch In December

By Zacks Equity Research of Zacks.com

Wednesday, December 2, 2015 9:58 AM EDT

The traditional investors may pin hopes on the Santa Clause rally in the most successful month of the year i.e. December, but they should note that this time Christmas might be a little dull, defying the natural progression of the end-of-season rally.

A consensus carried out from 1950 to 2013 has revealed that December has ended up offering positive returns in 49 years and negative returns in 16 years, with an average return of 1.59%, as per moneychimp.com, the best of the year.

But this year, the Fed is scheduled for a rate hike after a decade, provided the economic momentum remains the same. And though the move now seems well digested by the market, a certain shock is inevitable post lift-off.

In any case, 2015 had been quite downbeat so far. Even historically strong months couldn’t live up to investors’ expectations. All these made December a keenly watched month to the investing legion. We thus pin point a few ETFs that are highly in focus and could hop or drop in December.

iPath US Treasury Flattener ETN (FLAT)

As the Fed hikes the benchmark interest rate, the initial blow would be on the short-end of the yield curve. The investing world has already started to prepare for the move. As a result, yield on the 6-month Treasury note soared 15 bps from the 0.27% level seen at the start of November to 0.42% on November 30. In the same time frame, the yield on the 10-year Treasury note rose just 1 basis point to 2.21%. In fact, in the recent sessions, yields on 10-year U.S. treasuries declined indicating a flattening of the yield curve.

So, a keen watch on the inverse bond ETF FLAT is needed to earn some quick gains from the bond market.This product provides inverse exposure to the Barclays US Treasury 2Y/10Y Yield Curve Index, which delivers returns from the steepening of the yield curve through a notional rolling investment in U.S. Treasury note futures contracts. FLAT was up 1.3% in the last one month (read: 3 Treasury Bond ETFs to Play Rising Short Term Yields).

Barron's 400 ETF (BFOR)

This all-cap U.S. equity ETF could be in watch in December. The fund could be used as a representative of the total stock market performance in a volatile (expectedly) month. The fund is made up of high quality U.S. stocks. Since, the month of December is likely to stay volatile and large-cap stocks might be hurt by rising greenback post Fed tightening, an all-cap quality U.S. ETF might be the key to win ahead (read: 5 High Quality ETFs for an Uncertain Market).

US Equity High Volatility Put Write Index Fund (HVPW)

The markets are likely to be wobbly post lift-off and volatility levels should spike. Going bull on high-beta stocks may lead you to losses then. If this happens, investors can have a look at alternative ETFs like HVPW.

The fund looks to take advantage of the stocks with the highest volatility in the U.S. equity markets. As the volatility in a given stock rises, so does the price of the options traded on it. The underlying index of the fund seeks to generate income by selling put options on the most volatile stocks in a given two-month period along with interest earned on T-bills. HVPW added over 0.6% in the last one month (read: 3 Alternative ETFs for a Shaky Market).

Vanguard High Dividend Yield ETF (VYM)

Since income ETFs underperform when rates rise, this high income U.S. equities-ETF might fall out of investors’ favor in December. However, still-subdued inflation and global growth worries might keep the yields on benchmark 10-year U.S. Treasury from rising fast. If this happens, VYM may not be as hit as it is feared right now. As of November 30, 2015, the fund yielded about 3.09% while yields on benchmark 10-year U.S. Treasury is 2.21%. VYM is down about 0.9% in the last one month (as of November 30, 2015).

iShares S&P U.S. Preferred Stock Index (PFF)

Even in a rising rate environment, there are ways beat to the benchmark Treasury yield and earn smart income. Preferred stock is one such option. Preferred stocks are hybrid securities that are characterized by both debt and equity.

They have a higher claim on assets and earnings than common stock. These securities are less volatile than stocks and yield in the range of 5–6%. PFF yields 5.87% as of November 30, 2015 while it charges 47 bps in fees. PFF was up about 3% in the last one month (read: Why Income Investors Should Not Ignore Preferred Stock ETFs).

iShares Russell 2000 (IWM)

Small-cap stocks are the barometer of domestic economic health. So, when the U.S. economy shifts gear in December and experiences policy normalization, small-cap stocks should be the most beneficial zone.

While small-cap growth ETFs like PowerShares Russell 2000 Pure Growth ETF (PXSG) and iShares Russell 2000 Growth (IWO) have already started rallying, we believe these could be high risk choices as smaller capitalization and growth stocks are highly volatile in nature and succumb to a slowdown once the Fed hikes rates. So, investors can keep a close watch on small-cap blend ETFs like IWM. This Zacks Rank #2 (Buy) ETF was up over 3.2% in the last one month.

WisdomTree International Hedged Quality Dividend Growth Fund (IHDG)

While the Fed is preparing for a hike, other developed economies of the world and a few emerging economies are going the opposite direction. Due to growth issues, global superpowers like Europe, Japan and Australia are presently pursuing easy money policies.
While stocks of the concerned region are likely to soar, a currency-hedged approach is essential to set off the effect of a surging greenback. IHDG serves both aspects. Moreover, IHDG takes care of investors’ income too 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 was up over 1.9% in the last one month and yields 1.86%.

Market Vectors ChinaAMC SME-ChiNext ETF (CNXT)

China, the epicenter of the global chaos in summer, should also be in focus in December. In any case, this segment is exhibiting excessive volatility lately throwing shocks and surprises now and then. While Chinese stocks and ETFs flied at the start of November on a flurry of economic and demographic policy easing, it suffered its worst decline since summer to conclude the month. News about securities’ regulators probe into brokerages caused a stock market rout in China.

On the positive front, IMF agreed to declare yuan as a reserve currency which hints at a stable economy. So, Chinese ETFs are on the fence now with possibilities and perils on either side and investors may be interested in tracking its course in December (read: 6 Exceptional ETFs Up Over 15% YTD).