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Many ETFs are at performance crossroads, so now can be a good time to do some portfolio house cleaning and consider selling a few select ETFs.
With the market not far off of historic highs, seasonal downside pressure, the Fed ready to raise interest rates, and an uncertain U.S. presidential election about to weigh more heavily on the minds and collective sentiment of the investor crowd, now may be one of the best opportunities in months, or even years, to sell out of certain sectors that won’t hold up well in that environment.
More specifically, investors can have reasonable expectation to see a resilient U.S. economy but a simultaneous risk-off mode of investing taking place over the next several months. Therefore, assets and sectors that don’t do well in a rising interest rate environment can be good prospects to sell now. But also, the late-cycle stocks may be primed for selling.
ETFs to Sell: More Risk Than Reward
So with that backdrop, and in no particular order, here are three ETFs to sell now:
- VanEck Vectors Gold Miners ETF (NYSEArca: GDX): The recent run-up in the price of gold has greatly benefited the beaten-down gold miner equity class of gold ETFs. GDX and other ETFs that invest in gold miners was up as much as 80% in the first four months of 2016. But that run was mostly due to an unexpected “lower for longer” interest rate policy of the Fed. Now that rates look more likely to rise sooner than later, bets may be off for more upside potential; a significant correction could be in order for gold miner stocks in the short term. Still sitting at 65% gain on the year, now can be a good time to lock in gains with GDX.
- PIMCO 25+ Year Zero Coupon U.S. Treasury Index ETF (NYSEArca: ZROZ): Another interest-rate-sensitive area of the market is long-term bonds, especially long-term zero coupon U.S. Treasury bonds. ZROZ has had an extremely good run, as evidenced by its five-year annualized return of 15%, which beats 99% of all long-term bond funds and most stock funds, for that matter. It’s also up 15% year-to-date in 2016, and with interest rates looking to go higher, now is a good time to lock in some gains by selling some or all shares of long-term bond ETFs like ZROZ.
- Consumer Discretionary Select Sector SPDR Fund (NYSEArca: XLY): Cyclical stocks like those in the consumer discretionary sector can perform well in the late phase of the business cycle but if you want to turn down the risk before the investor crowd, you might want to consider selling shares of ETFs like XLY now while it’s still ahead of the S&P 500 in 2016. Although the economy is moderately healthy now, consumer sentiment turned lower in May, as reported by the Consumer Board’s Consumer Confidence Index.
Again, consider the combination of seasonal headwinds, the prospects of higher interest rates, an aging bull market and a U.S. presidential race that won’t likely produce confidence in the economy. All of these factors face the market in the short term. That’s why now is a good time to step back from sectors that have done well in the past few years and consider these ETFs to sell now.
Kent Thune is the owner of an investment advisory firm in Hilton Head Island, S.C. He personally does not hold any of the aforementioned securities. Under no circumstances does this information represent a recommendation to buy or sell securities.
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