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Touring the Asset Classes via Vanguard ETFs

They are the 3rd largest provider of ETFs. They successfully leveraged their reputation as the low-cost leader of indexing. Regardless of your investment approach or philosophy, Vanguard offers more than 65 vehicles to get you to your destination.

Halfway through 2013, it makes sense to evaluate the impact of a variety of market movers (e.g., global economy, central bank policies, geopolitical backdrop, corporate well-being, etc.) on different asset classes. I thought it might make sense to do so in the context of the products that Vanguard offers.

1. U.S. Stocks via Vanguard Total Stock Market (VTI). Corporate earnings have remained reasonably strong over the past 12 months, though profitability has largely been a function of debt restructuring and productivity increases. In contrast, actual sales numbers have been flat. Higher interest rates have already caused consumers to slow down on big ticket purchases. What’s more, economic contraction in Europe as well as global political upheaval are likely to affect forward guidance for U.S. companies. Even the technical resistance of the 50-day moving average is giving bearish traders food for thought.

VTI 50

2. U.S. Bonds via Vanguard Total Bond Market (BND). The Federal Reserve’s “tapering bomb” eviscerated income investors in the 2nd half of the 2nd quarter. With jobs data being strong enough to give the Fed some ammunition to follow through, rising rates could plague bondholders into the fall. Even the technical picture for BND is noticeably weak. On the other hand, with euro-zone debt fears reigniting, safe haven seekers may like the idea of U.S. treasuries and other domestic investment grade bond assets. Many have gone so far as to suggest that the Fed’s 10-year yield target is now 2.5%. (I think it will end the year closer to 2%.)

BND 50

3. Foreign Developed Stocks via Vanguard Europe (VGK). The U.S. by itself may the largest economy in the world, yet the eurozone (a.k.a. the 17 countries in the European Monetary Union) has often been described as the largest economic force on earth. With more than half of those member countries in extended periods of recession, however, it may be difficult to get excited about the investment opportunities of resident corporations. Portugal and Greece have unsustainable debt loads as measured by their 10-year sovereign bonds. Moreover, Portugal’s leadership is crumbling. Even a rise in the yields of Spanish and Italian bonds warrants vigilance. Equally disconcerting, all of VGK’s 2013 gains have been wiped out.

VGK 50

4. Emerging Market Stocks via Vanguard Emerging Markets (VWO). The export dependency of developing nations is being sideswiped by Japanese currency debasement as well as limited demand from the euro-zone. Economic growth is waning in China as well as Brazil. Meanwhile, years of underperformance has tested even the most ardent buy-n-holders. Outflows from emerging market equities have been enormous. Granted, P/E ratios of 10 may be at a 30% discount to U.S. stocks. Nevertheless, technical traders often smell blood in the water when assets trade below 200-day trendlines and 50-day moving averages cross below 200-day moving averages.

VWO 50 200

5. U.S. Real Estate Investment Trusts via Vanguard REIT (VNQ). Between the start of the year and early May, few asset classes soared as high as the dividend-paying real estate investment trust. And why not? Businesses and individuals were clamoring for property due to the lowest mortgage rates on record. That warm fuzzy feeling changed the minute the Fed hinted that it might slow its bond-buying program. Less bond buying, higher mortgage rates. Higher mortgages, less refinancing activity and less mortgage applications. Granted, VNQ catapulted on a lack of fear, but it has sold off on a profit-taking abundance of fear. Holding above a long-term 200-day moving average may be key to the viability of the asset class over the next 6 months.

VNQ 50 200

Vanguard recently introduced an ETF for international bonds, Vanguard Total International Bond (BNDX). It is not possible to discuss the asset class of international bonds with this vehicle. That said, we can note that international bonds were hit far worse by the Fed’s discussion of tapering than domestic securities. ETFs like WisdomTree Emerging Market Local (ELD), SPDR International Treasury Bond (BWX) as well as iShares International Treasury (IGOV) all registered losses between 5% and 10% over the last 6 months.

Vanguard does not have a precious metals ETF either. Maybe that’s a good thing for the fund family. After all, Vanguard Precious Metals (VGPMX) is down about 35% year-to-date thanks in large part to the extreme bearish price movement for gold and silver.

In sum, the only asset class that has not stared into the face of adversity is U.S. stocks. Still, avoiding a summertime slump may require positive corporate guidance in the upcoming earnings season, stable or falling bond yields as well as eurozone debt crisis containment. How tall is that order?

Filed in: ETFs

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