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Three First Trust ETFs for the year ahead

First Trust's Karl Cheong names three ETFs designed to capitalize on sectors expected to stay strong in 2016.

Jess Morgan 15 January, 2016 | 6:00PM
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Karl Cheong: The overall theme for these selections is really rising interest rates. We saw the Federal Reserve increase interest rates in December. But the key point when you look at these ideas is not to panic. As the Federal Reserve actually increased interest rates by 25 basis points, it's not going to stop firms like Apple from innovating, or any other company. It's not going to stop you from buying a house or buying a car because the Fed increased rates by quarter of a point.

If you want additional safety, there are options for you. You can either hedge out your duration risk or lower your duration. For example, FSL, our First Trust Senior Loan ETF. Now this is an asset class that essentially is duration-free, has a yield over 4% and is trading below par, and First Trust has one of the largest and most liquid options available in the marketplace. It's actively managed and we have been able to outperform because we've completely sidestepped the energy crisis or meltdown that’s happened over the last year or so.

Technology has actually been the best performing sector in a rising interest rate environment. It's actually outperformed the S&P 500 by close to 17% over the full cycle. Tech companies tend to have low sensitivities to oil and interest rates, due to their massive cash hoards. When you think about technology within the S&P/TSX Composite, it's not represented at all. But it represents about 20% weight in the S&P 500. So what makes sense is to look at U.S. technology to invest and especially as a counter-balance to large positions you may have in your Canadian stock or Canadian equity mutual funds.

The key point here is that the Fed increased interest rates in December, and they are now paying banks close to 50 basis points on excess reserves, compared to 25 basis points back in December. So what that means is that banks now have $7 billion of additional net income. So what that means to me is that financials will be a great place to invest going forward. Also, rising interest rates usually indicate an improving economy. So you are going to have generally lower loan losses for banks, higher loan growth and higher net interest margin. So the spread between what they deposit and what they loan out should be greater, all benefiting financials.

FHF is the First Trust AlphaDEX ETF. It's designed to provide returns above and beyond the marketplace but also minimize some of the tax consequences you have by buying U.S. property like U.S. stock or a U.S.-listed ETF.

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About Author

Jess Morgan

Jess Morgan  Jess Morgan is the associate editor of Morningstar Canada’s website. She began her career as a television producer and freelance writer, often making appearances on TV and radio as a commentator on politics and culture. She holds a BA in communications from the University of Winnipeg and a diploma in Creative Communications from Red River College.

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