2 ETFs To Consider Buying (And 1 To Avoid) This Week

Treasuries should maintain their strength, but the value trade looks like it's breaking down.
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Even though the S&P 500 (SPY) managed to achieve a new all-time high last week, there are some signs of concern behind the scenes. The most notable of which is that Treasuries continue to post gains coming off of the March peak in interest rates. Since then, the yield on the 10-year Treasury note has fallen 40 basis points, even after this past Friday's spike in yields.

On top of that, small-caps are lagging. If investors were as bullish as the S&P 500 is indicating, you'd expect to see small company stocks outperforming. We're not seeing that right now and it could be because the value trade is breaking down. As interest rates continue to fall and the latest economic data suggest that growth rates have peaked, investors have begun rotating away from cyclicals, such as financials and industrials, and back towards growth sectors, such as tech and consumer discretionary.

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This week's ETF picks will reflect those themes and where I believe the market is headed. In general, I'd be cautious of going too deep on equities here and believe that the bond market is providing a more accurate picture of economic sentiment at the moment.

Here are three ETFs I'm going to be watching this week and the narratives that go along with them.

iShares 20+ Year Treasury Bond ETF (TLT)

With only minor interruptions throughout 2021, large-caps have mostly been in a steady uptrend. Last Friday's close marked the 38th record high that the S&P 500 has set already this year. Sentiment has remained pretty bullish on stocks ever since the March 2020 low, but it's important to watch what the bond market is doing too. In this case, it may be providing a warning sign.

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Since the middle of May, both large-caps and long-term Treasuries have gained 10%. Those kind of highly correlated double-digit gains over such a short period of time is highly unusual. The question is why stocks and bonds, two asset classes which are generally inversely correlated, are moving higher at the same time.

I think it's some combination of four main ideas:

  • Rising concerns over the delta variant of COVID
  • Acknowledgement that GDP growth rates are beginning to slow
  • Spiraling debt and the coming debt ceiling showdown could get ugly
  • inflation expectations are easing

The economic recovery is continuing, but there are obstacles that could impede its progress and potentially delay it. I think the Treasury market is sensing it and investors are playing it defensively.

In June, I ran a Twitter poll when the 10-year was at 1.5% asking which milestone it would hit first.

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Even as sentiment was bullish, a full 40% of respondents thought that rates were headed back towards 1%. I think equity investors are remaining vocal and bullish, but more economically-driven bond investors are taking risk off the table here. I'd tend to side with bond investors.

KraneShares CSI China Internet ETF (KWEB)

China tech was one of the hottest market sectors as recently as February of this year. That's all changed lately thanks to the Chinese government, who has spent a lot of time and effort trying to crackdown on the activities of several tech and internet giants.

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KWEB, which manages for than $4 billion and has more than 25% of its assets invested in the combination of Alibaba, JD.com and Tencent, has been hit hard as investors reset their expectations of what the new Chinese tech landscape could look like.

KWEB currently sits about 40% off of its all-time high reached in February and is underperforming the broad emerging markets averages by about 25% year-to-date. Momentum investors might suggest this is a strong signal to stay away from this sector, but I actually think it's an intriguing entry point. The selling looks like it's overdone at the moment and the trio of China tech giants are still growing at a rapid pace and maintain excellent long-term potential. I expect growth stocks to remain in favor over cyclicals throughout the rest of 2020 as global growth slows and that could provide a favorable backdrop for Chinese tech.

There may be some uncertainty and volatility as the political backdrop plays out, but this looks like a sector on sale at the moment.

Vanguard Russell 2000 Value ETF (VTWV)

Is the value trade dying in 2021? It's sure looking that way. After leading throughout most of this year, large-cap growth has once again overtaken large-cap value in terms of year-to-date total returns. Cyclicals have given up leadership, especially materials and financials, while tech resumes its familiar position of outperformance once more.

Small-cap value, however, continues to remain well ahead of small-cap growth for 2021, but the trend is very definitely headed in the other direction.

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Since the early part of June, small-cap value has lagged by more than 8% and the underperformance has been steady. The landscape for this group depends largely on your opinion of how cyclicals will perform over the next several months. Personally, I'm skeptical. Cyclicals have struggled to sustain any degree of outperformance even as the economy was recovering, so I think the future might even be tougher as economic growth slows. Investors continue to show a firm preference for large-cap growth and I think that trend is likely to continue.

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