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Looking For ETF Dogs That Will Hunt

October 10, 2016 8:47 am
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Some investors know about the “Dogs of the Dow” strategy, which advocates buying the 10 highest-yielding of the blue-chip index at the end of the year and hold those names for a year.

Historical data suggest the strategy works. So, with the fourth quarter here, now may be a good time for investors to consider some dogs among exchange-traded funds.

In a recent research note, BlackRock, Inc. (NYSE: BLK), parent company of iShares, the world's largest ETF issuer, examines an ETF dogs strategy.

Pedigree Lineup

Looking at the 25 worst-performing members of the expansive iShares lineup as of Sept. 30, investors will notice some obvious themes, notably the presence of ex-U.S. developed markets ETFs on the list of slack performers.

Related Link: Terms Of The Trade: Dogs Of The Dow Investing Strategy

Sixteen (16) of the 25 ETFs on the BlackRock list are ex-U.S. developed markets funds. Underscoring the point that dollar weakness has been a major headwind for currency hedged ETFs this year, six of the 25 iShares dogs are currency hedged funds.

“Because ETFs hold bundles of securities, you can still keep your focus narrow — there's an ETF for almost any market segment you can think of — while helping to diversify your risk,” notes BlackRock. “Finally, rather than automatically rebalancing once or twice a year, it's important to recognize that an ETF 'story' may unfold over a different horizon — potentially demanding patience and fortitude.”

Not Too Crowded In The Winners’ Circle

Indeed, it could take a while for some ETF dogs to shed that ominous label while others have the potential to do so much faster. The iShares Nasdaq Biotechnology Index (ETF) (NASDAQ: IBB) and the iShares Dow Jones US Pharm Indx (ETF) (NYSE: IHE), two of the 25 dogs, have been dragged lower by election year rhetoric, but as markets reconcile a likely victory by Hillary Clinton, the healthcare sector offers rebound potential.

Laggin’, Draggin’ Pups

At the other end of the spectrum, the iShares Currency Hedged MSCI Italy ETF (NYSE: HEWI) the worst-performing member of the iShares dogs list of September 30, likely has its work cut out for it after losing nearly 20 percent through the first nine months of the year.

Not only do currency hedged ETFs need the dollar to rise, but HEWI's dog status could prove harder to erase because of the fragility of Italy's banking and the massive debt burden facing the eurozone's fourth-largest economy. Those are significant problems that will take a long time, to put it delicately, to work through.

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