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The iShares MSCI France ETF: An Exceptional Fund
France has a diversified advanced economy. France has at least one world class competitor in almost every sector. The fund is comprehensive, balancing individual large caps with combined less weighted mid-caps. It simply cannot be helped. France has a certain ‘ambience’. Think of France and Gustave Eiffel’s ‘ Tour Eiffel’ immediately comes to mind. The imagination strolls around Champ de Mars or perhaps Champs-Élysées gloriously crowned by the Arc de Triomphe de l’Étoile . The mind’s eye bicycles along country roads winding along endless pastures, or through the narrow rue des villes médiévales . Then, of course, French epicure , le pain , la pâtisserie , le vin , le fromage and of course, le champagne . Lastly, where would we be without the fashion innovations originating from the very heart of France: Paris! Rarely does one think of France along with machinery, aircraft, electronics, high speed railways or industrial centers. However, France is one of the world’s leading advanced economies. Needless to say, agriculture is a large part of the French economy as are luxury goods, tourism and ‘specialty foods’. So then, is France in your future? Well, if you simply can’t get away for a few months for a leisurely, casual tour of France, perhaps you can start saving for a family excursion some time in the future! There aren’t too many ways to invest with an ‘all France ETF’, however. The best available way is found in BlackRock’s (NYSE: BLK ) portfolio of single country ETFs, namely, the iShares MSCI France ETF (NYSEARCA: EWQ ) . (click to enlarge) According to BlackRock, the fund is composed of “… large and mid-sized companies in France …” with exposure to “…85% of the French stock market…” The pie chart demonstrates the fund’s sector allocation. The table directly below the chart defines the MSCI (NYSE: MSCI ) France Index allocation. It’s clear that the fund and index are essentially allocated the same way. Both fund and index have the same number of holdings, with the exception of a small fund allocation in Euro or U.S. Dollar cash. The fund weights individual companies differently. For example, the index weights L’Air Liquide SA ( OTCPK:AIQUF ) slightly more than Danone (OTC: OTCQX:GPDNF ) and Societe Generale (OTC: OTCPK:SCGLF ) over Schneider Electric ( OTCPK:SBGSY ) . Data from BlackRock Financials 18.36% Industrials 18.28% Consumer Discretionary 17.43% Health Care 10.62% Consumer Staples 10.59% Energy 9.08% Information Technology 4.37% Materials 4.36% Utilities 3.67% Telecom Services 3.24% Data from Reuters, Yahoo Finance and multiple sources The heaviest weighting in the financial sector is BNP Paribas ( OTCQX:BNPQY ) , France’s largest domestic financial services company which extends throughout Belgium, France, Italy and Luxembourg. Its international services extends to 75 countries, globally. The distribution in this sector ‘ladders’ down without having any one company dominate. Further, the sector is diversified in insurance, investment banking and commercial real estate. There are also included a number of holdings of less than 1%; all such holdings total 3.21% of the sector. These include four REITS, insurance and reinsurance as well as two interesting investment companies. Wendel Investissement (OTC: OTCPK:WNDLF ) may best be described as an ‘activist investment company’, taking large majority ownerships in listed or unlisted companies along with activist board management. Eurazeo ( OTC:EUZOF ) is the merged Eurafrance and Azeo . It is essentially a diversified venture capital fund. Financials 18.41% Fund Weight Ticker Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business BNP Paribas 5.083% BNPQY $72.503 2.76% 26.42 -3.36% 9.46 Bank services in Europe; retail personal finance, asset management, corporate finance; International AXA 4.227% OTCQX:AXAHY $67.20 3.88% 48.52 -0.74% 12.89 Insurance, life, property, casualty, asset management and banking; International Societe Generale 2.8165% SCGLF $38.116 2.73% 28.00 -5.06% 10.04 Retail, corporate and investment banking services; insurance, vehicle leasing; asset clearing, asset management; International Unibail Rodamco 2.033% OTC:UNBLF $24.779 4.11% 42.66 2.93% 11.56 REIT: Commercial real estate, development, construction and management; Shopping Centers, Convention; International Credit Agricole 1.040% OTCPK:CRARF $31.623 3.14% 28.34 -5.33% 9.25 Insurance and international retail banking services; corporate banking services; International Averages 3.04% $46.84 3.32% 34.788 -2.31% 10.64 Data from Reuters, Yahoo Finance and multiple sources Financial holdings less than 1% accounting for 3.2109% of Financials WENDEL 0.2785% KLEPIERRE REIT SA ( OTC:KLPEF ) 0.8122% EURAZEO SA 0.2204% SCOR SE 0.4904% FONCIERE DES REGIONS REIT SA ( OTC:GSEFF ) 0.2174% NATIXIS SA ( OTCPK:NTXFF ) 0.4648% ICADE REIT SA ( OTC:CDMGF ) 0.1936% GECINA ( OTC:GECFF ) 0.3478% CNP ASSURANCES ( OTC:CNPAF ) 0.1858% Data from Reuters, Yahoo Finance and multiple sources Industrials are also ‘well scaled’, starting with aerospace giant Airbus ( OTCPK:EADSF ) ( OTCPK:EADSY ) at 3.322%. The heavier weighted holdings include engineering and design firms, another aerospace company, Safran ( OTCPK:SAFRY ) and Schneider Electric specializing in energy application design and management. The sector includes 11 holdings of less than 1% each, totaling 4.1877%. Some of the more interesting companies include Bouygues SA ( OTCPK:BOUYY ) , specializing in media and telecom infrastructure construction and management; rail transportation specialist Alstom SA ( OTCPK:ALSMY ) and lastly, the famous maker of the most familiar ball point pen ever, SOCIETE BIC . Industrials 18.14% Fund Weight Ticker Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business AirBus 3.322% EADSF $54.482 1.89% 34.02 7.23% 17.67 Premier aerospace commercial and defense; space launch vehicles and satellites (fmr: EADS NV) Schneider Electric 2.72% SBGSY $35.213 3.48% *42.91 9.57% 18.38 Energy management, automation, infrastructure, distribution, building automation and security, data centers Vinci 2.4915% OTCPK:VCISY $28.246 3.04% 46.57 4.47% 16.64 Engineering, design and construction, urban development, buildings, water, energy, and communications services Safran 1.820% SAFRY $29.269 1.82% *10.65 7.02% NA Aerospace, propulsion systems, solid fuel boosters, aircraft components, aircraft engines Compagnie de Saint-Gobain 1.709% OTCPK:CODYY $24.287 3.13% 90.14 1.67% 29.11 Materials and packaging; high-performance ceramics, plastics, abrasives; gypsum, piping; bottles and jars LeGrand 1.257% OTC:LGRDY $15.50 2.06 *46.53 4.69% **26.26 Electrical engineering and equipment manufacturing including data information networks Averages 2.22% $31.17 2.22% 45.137 5.78% 21.612 *percent of operating cash flow **trailing Data from Reuters, Yahoo and multiple sources Industrial holdings less than 1%, accounting for 4.1877% of Industrials ZODIAC AEROSPACE (OTC: OTC:ZODFF ) 0.4311% THALES SA ( OTCPK:THLEF ) 0.6457% SOCIETE BIC 0.3854% BOUYGUES SA 0.6201% EDENRED ( OTCPK:EDNMY ) 0.3333% ALSTOM SA 0.54% REXEL SA ( OTCPK:RXEEY ) 0.3322% GROUPE EUROTUNNEL ( OTCPK:GRPTY ) 0.481% BOLLORE SA ( OTC:BOLRF ) 0.3156% BUREAU VERITAS REGISTRE INTERNATIONAL ( OTC:BVRDF ) 0.4501% AEROPORTS DE PARIS ( OTC:AEOXF ) 0.2832% Data from Reuters, Yahoo Finance and multiple sources France is the home of many of the most well-known consumer discretionary brand names such as Moet Hennessy Louis Vuitton ( OTCPK:LVMHF ) or Kering ( OTC:PPRUF ) . The lesser weightings are no less “brand impressive”, such as Christian Dior (OTC: OTC:CHDRF ) . The interesting holdings include SODEXO SA ( OTC:SDXOF ) , providing ‘on-site’ services from housekeeping to prisoner rehab and anything in between; Ses Global SA ( OTCPK:SGBAF ), a Luxembourg based satellite communication and broadcasting service; and international media company Lagardere ( OTCPK:LGDDF ) . Consumer Discretionary 17.6851% Fund Weight Ticker Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business LVMH Moet Hennessy Louis Vuitton 3.732% LVMHF $83.55 2.18% 17.14 12.43% 13.43 The brand name which speaks luxury. Champagne, cognac, fragrances, cosmetics, accessories, under a host of brand names Vivendi 2.025% OTCPK:VIVEF $28.95 10.14% *180.07 -17.95% **7.07 Media through subsidiaries Canal+, Universal Music, Vivendi Village Renault SA 1.553% OTC:RNSDF $29.65 2.08% ***20.54 4.02% 10.04 Auto, light truck manufacturer; financing, commercial services under Renault, Renault Samsung, Dacia Michelin 1.486% OTCPK:MGDDF $18.328 2.77% 41.88 5.72% 15.45 The brand name that speaks tires of every type as well as its coveted restaurant and hotel guides Kering 1.073% PPRUF $21.89 2.50% 40.40 -5.87% 22.25 Luxury goods manufacturer and retailer; apparel, accessories, fragrances, cosmetics Publicis Groupe 1.006% OTC:PBCBF $14.347 1.99% 32.25 9.91% 16.56 Communications platform management services: Digitas, Razorfish, and social network platforms Valeo 0.9636% OTCPK:VLEEY $11.885 1.60% ***26.86 11.16% 16.91 Auto replacements parts, driver assist systems, powertrains, comfort and convenience, lighting systems Averages 1.69% $29.80 3.32% 51.306 19.42% 14.53 *percent of operating cash flow **trailing; ***percent of EPS Data from Reuters, Yahoo Finance and multiple sources Consumer Discretionary holdings less than 1%, accounting for 5.846% of Consumer Discretionary holdings CHRISTIAN DIOR 0.8194% PEUGEOT SA ( OTCPK:PEUGF ) 0.6432% SODEXO SA 0.7723% EUTELSAT COMMUNICATIONS ( OTCPK:ETCMY ) 0.4267% SES SA 0.7717% NUMERICABLE-SFR ( OTCPK:NUMCF ) SA 0.3741% HERMES INTERNATIONAL ( OTCPK:HESAY ) 0.7692% LAGARDERE 0.2835% ACCOR SA ( OTCPK:ACRFF ) 0.7552% JC DECAUX SA ( OTCPK:JCDXF ) 0.2307% Data from Reuters, Yahoo Finance and multiple sources The main holdings of the Consumer Staple Sector seem to lean towards consumer discretionary, most notably in the inclusion of L’Oréal ( OTCPK:LRLCY ) at 3.589% of the fund. To be sure, it’s a global, well founded corporation whose primary business is the development, marketing and distribution of cosmetics which seems to put it in competition with the likes of Louis Vuitton held in the consumer discretionary sector. Similarly, Pernod Ricard ( OTCPK:PDRDY ) at 1.964% manufactures higher end distilled spirits. Casino Guichard Perrachon (OTC: OTC:CGUIF ) is a retail chain distributor, supermarkets, hypermarkets, discount and convenience stores; what one would consider a consumer staples company; and lastly, Remy Cointreau SA ( OTCPK:REMYY ) , also a manufacturer of wines and spirits. It seems that the difference between discretionary and staple products is a gray area. C’est la vie. Consumer Staples 10.5318% Fund Weight Ticker Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business Loreal 3.589% LRLCY $96.26 1.67% ***52.43 5.22% 30.36 R&D, marketing and distribution, ‘mass-market retail’ Danone 3.255% GPDNF $44.386 2.40% 112.94 7.13% 40.84 Holding company for Danone Group, Dairy, Yogurt, life stage nutrition; nutrition enhanced water Pernod Ricard 1.964% PDRDY $29.84 1.72% 55.49 3.86% 32.11 Wines and spirits under brands Absolut, Ricard Pastis, Chivas, Glenlivet, Beefeater; 16 in all; owns 5660 ha of vineyards Carrefour 1.332% OTCPK:CRRFY $22.08 2.50% 53.22 -2.53% 20.97 Hypermarkets, supermarkets, discount and convenience, cash & carry stores and e-commerce Averages 2.54% $48.14 2.07% 68.52 3.42% 31.07 ***percent of EPS Data from Reuters, Yahoo! and multiple sources Consumer Staple holdings less than 1%, accounting for 1.592% of Consumer Staple holdings Casino Guichard Perrachon 0.246% Remy Cointreau SA 0.1435% Data from Reuters, Yahoo Finance and multiple sources The Health Care holdings are dominated by the world renowned pharmaceutical Sanofi (NYSE: SNY ) at 8.33% of the fund’s 10.4613% combined Health Care holdings. Sanofi is what one might expect; however, the other holding is a bit more interesting. Essilor International ( OTC:ESLOF ) is a developer and manufacturer of Ophthalmology and Optometry medical equipment as well as corrective lenses. Health Care 10.4613% Fund Weight Ticker Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business Sanofi 8.330% SNY $122.23 3.71% 75.73 1.78% 21.65 R&D, manufacture and marketing of vaccines, pharmaceuticals, animal health Essilor International 2.132% ESLOF $27.138 0.87% 34.98 11.65% 40.61 Ophthalmology and Optometry medical equipment development through manufacturing Averages 5.23% $74.68 2.29% 55.36 6.72% 31.13 So far, in each of the above sectors, most of the holdings were greater than 1 percent. In the remaining sectors, it is quite the opposite, hence all are included. For example, the energy sector is dominated by the global energy giant Total (NYSE: TOT ) at 8.536% of the total 8.974% of that sector. The remaining 0.438% is weighted by Technip ( OTCQX:TKPPY ), providing project management, consultation and construction in the energy industry. Energy 8.974% Fund Weight Ticker Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business Total 8.536% TOT $115.910 5.83% 195.03 6.33% 32.27 Wellhead to final point of sale hydrocarbons, refined petroleum oils, gases and chemicals Technip 0.438% TKPPY $5.844 4.24 185.6 9.31% 337.73 Engineering, construction and management for on/off shore energy projects Averages 4.49% $60.88 5.04 190.315% 7.82% 185.00 Information Technology is pretty well laddered with the major French IT companies, Cap Gemini ( OTCPK:CAPMF ) and Alcatel-Lucent (NYSE: ALU ) . Just one note: Ingenico Group ( OTC:INGIF ) is formerly Compagnie Industrielle et Financiere d’Ingenierie Ingenico SA ; the company provides secure global digital-mobile-internet transaction solutions including software and hardware. In October, it was announced that Ingenico was collaborating with Intel (NASDAQ: INTC ) in the field of secure retail transaction solutions. IT 4.5651% Fund Weight Ticker Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business Cap Gemini 1.241% CAPMF $16.066 1.40% 31.16 4.78% 23.35 IT consulting and professional staffing Alcatel Lucent 0.929% ALU $11.444 0.00 0.00 -2.35% 15.46 (est) Cloud, ultra and Broadband network equipment and services Dassault Systems 0.8425% OTCPK:DASTY $20.732 0.58% 29.22 12.89% 50.99 Software application solutions, services; CAD and design software Atos 0.5964% OTCPK:AEXAF $8.684 1.04% ***25.89 12.04 25.17 IT management, services and consulting CIE Industrielle Financiere (Ingenico) 0.5761% INGIF $7.716 0.84 ***23.86 18.06% 33.24 Secure financial transaction systems STMicroelectronics 0.3808% STM $7.247 5.43% 180.69 27.23% 44.50 Semiconductor manufacturer Averages 0.76% $11.98 1.50% 48.47 12.01% 32.118 ***percent of EPS Data from Reuters, Yahoo! and multiple sources The Materials sector has an average weighting of just over 1% and all the better. Over half of the weighting is in the mining and minerals sector through ArcelorMittal (NYSE: MT ) and Imerys ( OTC:IMYSF ) both under pressure from the collapse in commodity prices. Materials 4.1634% Fund Weight Ticker Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business L’Air Liquide SA 3.208% AIQUF $39.186 2.42% 51.45 5.10% 20.88 Gasses technology for industry such as beverage, food, pharmaceuticals Arkema 0.3958% OTC:ARKAF $5.31 2.76% 45.17 6.02% 18.73 Industrial chemical packaging, automotive, electronics, edibles and pharmaceuticals Arcelormittal 0.3596% MT $7.143 4.35% NA 5.38% 17.73 (NYSE: AVG ) Mining and steel manufacturing in Europe, Brazil, Africa and trade regions NAFTA and CIS Imerys 0.1998% IMYSF $5.386 2.62% ***45.46 5.86 17.19 Minerals extraction and processing for the production of porcelain, ceramics, tiling, bricks, pigments, paper, graphite and others Averages 1.04% $14.26 3.04% 47.36 5.59% 18.64 ***percent of EPS Data from Reuters, Yahoo Finance and multiple sources The average Utility holding is less than 1% but the yield is a noticeable 5.60%, albeit with a greater than 100% average payout ratio . Engie ( OTCPK:ENGIY ) and Veolia Environnement ( OTCPK:VEOEY ) are international and manage vital service utilities: water, sewage and electric. Veolia has offices in the Americas, Middle East, North Africa and Asia. Utilities 3.6889% Fund Weight Ticker Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business Engie 2.0591% ENGIY $42.00 6.27% 259.55 -1.34% 45.80 Natural gas and electricity; Europe, Americas, U.K., Turkey, Middle East, Asia and Africa Veolia Environnement 0.8772% VEOEY $13.289 3.17 99.60 -10.37% 31.97 Water treatment, distribution and recycling; wastewater, sanitations services; International Suez Environnement 0.4642% OTCPK:SZEVY $10.41 3.69% 158.54 3.10% 42.87 Water management, , distribution and recycling; wastewater collection/recovery EDF 0.2884% $26.78 9.27 ***39.31 4.26% 9.17 Electric utility; generating with nuclear, geothermal, hydro and other renewables Averages 0.92% $23.12 5.60% 139.25 -1.09% 32.45 ***percent of EPS Data from Reuters, Yahoo Finance and multiple sources The last sector, Telecom Services, is dominated by Orange (NYSE: ORAN ) , formally France Telecom . Just last week it was announced that Orange was ‘in talks’ to purchase Bouygues a diversified telecom and media company, including engineering, construction and management services mainly for public works projects. Telecom Services 3.2402% Fund Weight Ticker Market Cap (In USD Billions) Yield Payout Ratio 5 Year Sales Growth Price/ Earnings Primary Business Orange 2.7557% ORAN $48.106 4.02% 110.24 -2.53% 43.34 Multi-platform telecom services; internet, mobile, fixed line; submarine/international cable maintenance Iliad 0.4845% OTC:ILIAF $13.170 0.19% 7.57 16.35% 40.73 Telecom holding company with over 14 subsidiaries; multiplatform services Averages 1.62% $30.64 2.11% 58.91 6.91% 42.035 Data from Reuters, Yahoo Finance and multiple sources As for the fund itself, it first listed on March 12, 1996, hence it is well established and now holds $399,541,982 in assets. The expense ratio is 0.48% and its current share price is at a premium to NAV of 0.44%. The fund is liquid, with a 20 average daily volume of about 137,500 share. The fund moves pretty much with the market, having a beta of 1.09, although its standard deviation from its average is nearly 16%, meaning it trades in a range of ±$4.00 around its 3-year average. One last word and it’s important. There’s a bit of currency risk as the ECB continues to weaken the Euro in order to stimulate the EU economy as a whole. However, this is a ‘two sided coin’. On one hand, true, distributions may decline slightly through currency translation should the Euro weaken significantly from its current $1.08 USD per Euro. On the other side of the coin is that French exports of goods and services become less expensive for the importers. Hence, many of those French big caps with global reach will have a price advantage, not to mention other advantages; for example, luxury items, and of course, French Champagnes. Hence, the investor should be aware of the currency risk; however, over the very long term, any near-term weakening of the Euro may end up being an exceptional advantage. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
Introducing The ETF Monkey 2016 Model Portfolio
Summary For the past couple of weeks, I have been reading extensively through the 2016 investment outlooks of top-quality research firms. In this article, I will present six themes that I gleaned from my research. Ultimately, I will assign weightings and present The ETF Monkey 2016 Model Portfolio. In future articles, I will develop ETF-based portfolios based on this model, from three major providers. First of all, I would like to begin with a word of thanks to my 366 followers, and 88 real-time followers. When I started my work here on Seeking Alpha using the pseudonym ETF Monkey, I had a total of 59 followers from my previous work and, I believe, only five or six real-time followers. I am deeply grateful to each and every one of you! This past July 1, I presented The ETF Monkey Vanguard Core Portfolio . The portfolio features what I call “beautiful simplicity,” demonstrating that one can build a low-cost, greatly diversified portfolio with as few as three ETFs. Like many other authors here on Seeking Alpha, I would now like to offer my thoughts on a model portfolio for 2016. I have spent a fair amount of time over the past couple of weeks reviewing various 2016 outlooks from a variety of quality sources; including PIMCO , BlackRock (NYSE: BLK ), Wells Fargo (NYSE: WFC ), Vanguard , Bank of America Merrill Lynch (NYSE: BAC ), Goldman Sachs (NYSE: GS ), Deloitte , and AAII . Needless to say, there is a great deal of divergent thought represented in these outlooks. And, certainly, I was not able to carefully read every last word of every outlook. What I focused on, though, was looking for common themes ; ideas that ran through more than one outlook. From that research, I have developed The ETF Monkey Model 2016 Portfolio . In this article, I will feature the main themes that struck me, as well as outline what I believe to be a model asset allocation for the year ahead. But I am also going to go a step further. I will follow up this “theoretical” work in future articles by selecting what I believe to be the best ETFs to use to actually construct this portfolio. I will do so for three different major providers: Vanguard, Fidelity (featuring iShares funds), and Charles Schwab (NYSE: SCHW ). The idea will be that investors who use these three providers can select commission-free ETFs both to build and subsequently rebalance their portfolios, all without incurring excess trading costs. Finally, using closing prices on December 31, 2015, I will both build and track each version moving forward to get some idea of comparative performance. I will also track all of them against the performance of The ETF Monkey Vanguard Core Portfolio. As readers may surmise, I have a two-fold goal from this exercise: To attempt to determine how much of a difference selecting ETFs from different providers makes if one starts from the same basic place. For example, in some cases, one provider may offer a better expense ratio for a certain component or asset class. How much difference does this make over time? To attempt to determine if this “ideal” 2016 portfolio is able to outperform the rather basic ETF Monkey Vanguard Core Portfolio, built very simply using three core Vanguard ETFs and using the weighting derived from the Vanguard Target Retirement 2035 Fund ; designed for an investor approximately 20 years from retirement. Let’s begin by taking an overall look at the big picture. The Big Picture As they say, “a picture is worth a thousand words.” With that in mind, I am going to open this section, called “The Big Picture,” by very literally presenting three big pictures. Here’s the first one, from PIMCO’s 2016 outlook, featuring 10-Year return estimates across several asset classes: (click to enlarge) Take a quick look across those projections, particularly the asset classes highlighted in red. You will see each of those show up in some fashion in the themes I will develop as the article progresses. Here is our second big picture. This one is from BlackRock’s 2016 Outlook. (click to enlarge) Similar to the first picture, look at the boxes and arrows, and what they indicate. You may already be able to discern some common themes simply by comparing these two graphics. Finally, using the S&P 500 index to represent the U.S. stocks and various Vanguard ETFs as proxies for other averages, have a look at how various markets have performed over the most recent two-year period. In the graph below, the Vanguard FTSE Developed Markets ETF ( VEA) represents developed markets as an overall group, the Vanguard FTSE Emerging Markets ETF ( VWO) represents emerging markets, and the Vanguard FTSE Europe ETF ( VGK) represents Europe specifically. ^GSPC data by YCharts With that overview, we now come to six investment themes gleaned from my research, which I believe will benefit investors in 2016. Theme #1: The “New Neutral” Some investors may recognize the phrase “new neutral” as being from PIMCO, and you would be correct. Here is a brief quote concerning its overall expectations: At the center of our New Neutral thesis is the belief that even as central banks raise rates, they will do so slowly and prudently… We don’t foresee an inflation problem… Low interest rates and moderate inflation together support a muted but prolonged business cycle, and we believe this combination helps to sustain current asset valuations. We would argue that the tailwind from ever-lower policy rates… is largely past us. Moreover, current valuations… are likely to constrain potential returns going forward. Therefore investors must adjust to a world where returns on asset classes and the paradigm for constructing optimal portfolios over the next five years are unlikely to resemble those of the last five or even 30 years. Echoing similar sentiments, BlackRock’s 2016 Outlook offers the following: The wave of central bank liquidity looks to have crested. Monetary policy may take a back seat to other cycles for the first time since the financial crisis. Finally, this from Vanguard’s 2016 Investment Outlook: The U.S. Federal Reserve is likely to pursue a “dovish tightening” cycle that removes some of the unprecedented accommodation exercised due to the “exigent circumstances” of the global financial crisis. In our view, there is a high likelihood of an extended pause in interest rates at, say, 1%, that opens the door for balance-sheet normalization and leaves the inflation-adjusted federal funds rate negative through 2017. Essentially, this theme posits a period of muted results as we move forward. At the same time, while the tailwind provided by the current interest rate environment is almost surely behind us, the Fed is expected to move slowly with respect to raising interest rates, allowing some maintenance of current asset valuations. Theme #2: Better Opportunities May Exist Outside the U.S. Our second theme takes note of the historically high valuations currently reflected in the U.S. market, and the fact that one may find better returns in 2016 by being willing to look beyond the shores of the United States. For this section, we will think very broadly in terms of the entire international segment, both with respect to developed and emerging markets. I will feature two specific targets in later sections. The BlackRock 2016 Outlook features this theme extremely succinctly: Valuations appear to have leapt ahead of the business cycle in many markets, especially in the U.S. We have essentially been borrowing returns from the future. PIMCO’s outlook appears to agree with this thesis, as explained here: In developed markets, to name a few examples, we believe global equities outside of the U.S. offer better forward return potential than those within. Across credit sectors we see superior opportunities in European financial and U.S. housing sectors. With respect to government debt, we generally find inflation-linked securities more attractive than their nominal counterparts. Finally, from Vanguard: The growth outlook for developed markets, on the other hand, remains modest, but steady. As a result, the developed economies of the United States and Europe should contribute their highest relative percentage to global growth in nearly two decades. Based on this theme, I will include a relatively modest allocation for domestic (U.S.) equities and what may be considered to be a somewhat aggressive allocation in developed international markets in my model portfolio for 2016. Theme #3: Consider Europe The BlackRock 2016 Outlook specifically features Europe as a candidate for consideration. It writes: For example, we suggest building exposure to cheaper developed markets where monetary policy is unambiguously expansionary and valuations are more forgiving, such as in Europe and Japan. This is backed up by a helpful table comparing the valuation levels of U.S. securities against their European counterparts, both in various sectors as well as overall. (click to enlarge) PIMCO also features this in its outlook, noting many of the same characteristics. Looking around the globe, European equities appear attractive over the secular horizon. In addition to the broader developments discussed, the trend toward increased dividend payout and a higher equity risk premium provide a good backdrop for superior returns. European equities offer high levels of earnings yields and valuations are lower relative to history. In its Q4 Global Economic Outlook , after frankly discussing the challenges Europe faces from the slowing Chinese economy, Deloitte offers the following observation: Despite this very volatile, challenging environment, the Eurozone has continued its recovery. In fact, this may be seen as evidence that the recovery can now weather external shocks. In this way, the Eurozone has left the “stall-speed-phase” of the recovery behind, in which it was highly vulnerable to external turbulences. Finally, with regard to the related outlook for monetary policy in Europe, Vanguard notes: Elsewhere, further monetary stimulus is highly likely. The European Central Bank and Bank of Japan are both likely to pursue additional quantitative easing and, as we noted in our 2015 outlook, are unlikely to raise rates this decade. Based on this theme, in addition to my overall allocation in developed international markets, I will include a small additional allocation dedicated specifically to Europe in my model portfolio for 2016. Theme #4: A Measured Gamble on Emerging Markets This particular item may be the most high-risk, high-reward venture within the portfolio. The picture in emerging markets is far from clear. In my research, I found comments ranging from great concern to cautious optimism. Clearly, the impact from China may be acutely felt in these economies, so could the effects of the Fed increasing interest rates in the U.S. Perhaps, the clearest example of a positive comment I saw comes from PIMCO. It acknowledges the risks but, at the same time, offers some possible reasons for optimism: Turning to emerging markets (EM), we believe that on average these sectors should outperform comparable developed market sectors over the secular horizon, but are likely to do so with higher volatility and other risks that must be considered. As in the developed markets, lower yields have been a tremendous supporter of performance for EM assets following the financial crisis. However, in the past few years, emerging markets have gone through numerous challenges that have led to generally disappointing performance. Lower growth, lower commodity prices, weak exports and a strong U.S. dollar recently have been serious headwinds. The silver lining of the recent challenges, however, is that EM assets generally offer more favorable starting valuations. EM growth, which is expected to be higher than in developed markets, also helps valuations appear attractive. Add in the higher level of investments and productivity enhancements, and we have a favorable backdrop for attractive secular returns from emerging markets. Bank of America/Merrill Lynch offers this somewhat positive view: Start of emerging markets recovery – For the first time since 2010, average annual growth in emerging markets should begin rising to 4.3 percent in 2016 from 4.0 percent in 2015. Excluding China, growth should pick up to 3.1 percent in 2016 from 2.6 percent in 2015. About three-quarters of emerging market economies could show signs of recovery by the middle of 2016, whereas Brazil could contract further to -3.5 percent as it struggles to climb out of recession. Investment likely will become the key driver of the emerging market recovery. Asset price returns of roughly 2.7 percent for external sovereign debt, 2.5 to 3.5 percent for emerging market corporate debt, and 1.0 percent for local currency debt are expected in 2016. In contrast, Vanguard cautions: Most significantly, the high-growth “goldilocks” era enjoyed by many emerging markets over the past 15 years is over. Indeed, we anticipate “sustained fragility” for global trade and manufacturing, given China’s ongoing rebalancing and until structural, business-model adjustment occurs across emerging markets. We do not anticipate a Chinese recession in the near term, but China’s investment slowdown represents the greatest downside risk. Finally, BlackRock summarizes their view of emerging markets this way: Investor sentiment is near record lows, according to the latest BofA Merrill Lynch Global Fund Manager Survey, which we view as a good contrarian indicator. Assets also are generally cheap… The same is true for companies that derive a large part of their revenues from the emerging world including China. They have severely underperformed in the past year… and now offer selected value. We are nibbling at EM assets, but not enough to fill our overall underweights. I have been watching this segment closely for some time. Given the weak pricing of this asset class, which can be graphed as being basically flat since 2009, this is going to be the biggest gamble in my model portfolio for 2016. I am going to assign it a relatively aggressive weighting of 7.5%. Theme #5: Consider TIPS As A Preferred Alternative To Bonds This theme actually caught me by surprise as I went through my research. With the prospects for inflation remaining low, TIPS have fallen somewhat out of favor of late. Interestingly, this is commented on favorably in BlackRock’s outlook: Among government bonds, only Treasury Inflation Protected Securities (TIPS) have gotten cheaper. Ten-year TIPS are effectively pricing in an average annual inflation rate of just 1.25% measured in personal consumption expenditures (PCE) terms, well below the Fed’s 2% target. Even 30-year inflation expectations have been dragged down by the oil price slump, pricing in annual PCE inflation of 1.45%. Can inflation really stay so low for so long? This sets a low bar for TIPS to outperform nominal bonds. PIMCO appears to agree with this view. Here are its comments: For the core government bond anchor in a multi-asset portfolio, we like U.S. TIPS (Treasury Inflation-Protected Securities). Not only are they an asset carrying only one risk, real rate risk (unlike nominal government bonds that carry both real rate and inflation risks), but we also view them as attractively valued relative to nominal bonds. The large amount of slack in the global economy over the past few years as well as the recent commodity price correction have resulted not only in a drop in inflation expectations (and fears of possible deflation until recently), but also in a near complete removal of inflation risk premium from the markets. Under these conditions, we think TIPS are an attractive choice for the core fixed income component of a multi-asset portfolio. Based on this theme, my allocation to TIPS will actually exceed my generic allocation to bonds in my model portfolio for 2016. In addition, my allocation to bonds will be right on the middle of the market, in terms of duration. I hope to balance the amount of income provided with overall downside risk. Theme #6: Include Some Exposure To REITs A truly diversified portfolio includes exposure to both multiple geographies as well as multiple asset classes. This can include some form of exposure to real assets . In the graphic from PIMCO featured towards the outset of this article, you will notice that, in addition to TIPS, the greatest forecasted returns over the next 10 years were featured as coming from REITs. I was happy to see this, as I include a measured weighting in REITs in my personal portfolio. What makes REITs intriguing to me is that they represent an asset class that is sort of partway between stocks and bonds. Their unique tax structure requires that they pay out at least 90% of their earnings in the form of dividends, making them in some ways similar to a bond. At the same time, a well-run REIT can also benefit from capital gains, as the value of the properties they hold can increase over time, making them in some ways similar to a stock. Based on this theme, in addition to my overall allocation for bonds and TIPS, I will include a modest additional allocation dedicated specifically to REITs in my model portfolio for 2016. Putting It All Together: The ETF Monkey 2016 Model Portfolio Based on everything that preceded it, here are the official asset allocations for The ETF Monkey 2016 Model Portfolio: Asset Class Weighting (%) Comments Domestic Stocks (General) 30.00 See Theme #2. Domestic Stocks (High Dividend) 5.00 I am going to include one ETF providing minor targeted exposure to high-yield securities, to help generate income for the portfolio. Overall, this brings my domestic stock allocation to 35%. Foreign Stocks – Developed 20.00 See Theme #2. Foreign Stocks – Emerging 7.50 See Theme #4. Foreign Stocks – Europe 5.00 See Theme #3. TIPS 15.00 See Theme #5. Bonds 10.00 REITS 7.50 See Theme #6. TOTAL 100.00 As I mentioned in the outset, look for further articles to follow. In these, I will reveal my choices for the specific ETFs with which to build this portfolio, from three different providers; Vanguard, Fidelity (with iShares funds), and Charles Schwab. Until then, I thank you for reading, and wish you… Happy Investing! 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