The first quarter proved to be spectacular for the major U.S.
equity indexes with all three benchmarks, the S&P 500,
NASDAQ and the Dow, reaching multi year highs. Many individual
stocks added double digits in this time frame as well, making
2013's Q1 one of the best first quarters for stocks in a long
Nevertheless, over the past few years, after a fairly good
first quarter the markets tended to lose steam in the second
quarter. However, the trend could reverse this year as the
technical as well as fundamental pictures are largely skewed in
favor of the positives (read
Top Performing ETFs of the First Quarter
Having said this it is important for the major catalysts like
unemployment data, housing data, retail sales as well as
corporate earnings to show an improvement in order that equities
continue the positive trend in Q2.
Against this backdrop, let us consider three ETF strategies
that have a high possibility of success now that we are in the
1) Earnings are the Key: A focus on earnings
It is a very well known that earnings are the biggest force
impacting stock prices. And this is probably the single biggest
factor that would determine the course of direction for equities
It is true that the low expectation from 4Q12 earnings was one
of the major catalysts behind the surge in equities. However,
things are different this time around.
Recent economic data has been improving. This has raised the
expectation bar from the 1Q13 earnings season which is about to
begin shortly. And any disappointment on this front would surely
upset the rhythm of the market-a dangerous situation indeed.
Still, one would imagine given the recent positivity from the
economy that a good earnings season could be in the cards (see
Focus on Earnings with These ETFs
Fortunately, for investors seeking to play the earnings
momentum, there are some products available in the ETF space.
These ETFs are typically fundamentally weighted with earnings as
Actually, these products do minimize realized volatility by
focusing on companies with strong bottom lines. They are,
however, slightly more concentrated in a handful of companies
having strong earnings, so there is a bit of risk there.
Nevertheless, for investors seeking an exposure in this space
WisdomTree Total Earnings ETF (
makes a good play for a broad market earnings picture. Also, for
investors looking for earnings play in the large, mid and small
cap segment separately,
are the respective ways to go.
In this regard it should be noted that the ETFs mentioned
above are not meant for momentum plays in the short term. Instead
investors seeking exposure in the earnings ETFs will be better
served if the have a fairly long term horizon, and are only
seeking profitable firms for their portfolios (read
ETF Strategies for Long Term Success
2) Short Term Bond ETFs continue to be good conservative
Interestingly, short term bond ETFs have seen huge inflows in
the first quarter this year especially compared to other fixed
income ETFs. This is strong evidence against the possibility of a
great rotation from bonds into stocks, at least for the time
This comes as a surprise amidst rising optimism and excitement
in the equity markets. However, a closer analysis reveals that
reason for their popularity lies in apprehension surrounding a
major pullback in the equity markets.
This is especially true considering the present investment
case for other safe haven instruments like long term treasury
bonds and gold. While treasury rates at the longer end of the
yield curve have been increasing, the ETFs tracking the longer
dated bonds have been slumping due to their high interest rate
Time for the Convertible Bond ETF?
Also, gold has been the victim of severe selling pressure from
large players on account of stronger equities and a firm dollar.
It also doesn't help that the outlook for gold remains rather
uncertain in the near term.
Therefore, it seems that short term bonds might have emerged
as the new safe havens. This could well carry on into the second
quarter as the apprehension and expectation surrounding an equity
market pullback will be even more now that the benchmarks are
trading near their all time high levels.
Thus short term bond ETFs could make for interesting
conservative plays in case a pullback does occur even though the
scope of high returns is pretty much negligible (see
Four ETFs to Buy on the Market Pullback
With this backdrop investors could look into ETFs with a large
asset base and good liquidity. The
Vanguard Short Term Bond ETF (
with a yield of around 1.5% and an expense ratio of 11 basis
points is an extremely attractive pick from this space. The
iShares Barclays 1-3 Year Credit Bond ETF (
is another alternative that investors can consider.
3) U.S. dollar is likely to outperform
Thanks to the devaluation of the Japanese yen and the
escalation of Eurozone woes, the U.S. dollar (USD) had gained in
value. Also, the British pound has been witnessing serious
depreciation versus the USD courtesy of its feeble growth outlook
and credit rating downgrade by rating agency Moody's in mid
Furthermore, this trend doesn't seem to be reversing anytime
soon as the strength in the U.S. dollar has been triggered more
by weakness in other currencies rather than U.S. economic
Also apart from the British pound which is now severely
oversold and could witness some strength in the near term, there
is no major catalyst for a surge in other major currencies going
British Pound ETF: Time to Buy?
In this regard, investors could look into the
PowerShares DB U.S. Dollar Index Bullish ETF (
as an option to play the strength in the U.S. dollar in the
second quarter, continuing the trend from the first quarter (see
Can the Dollar ETF (UUP) Finally Break Out?
). However, the product could witness some selling pressure
presently as it has run up quite a bit in the first quarter.
Still, its outlook for Q2 remains positive given the weakness in
Markets might be at or near all-time highs, but that doesn't
mean that there isn't value in the investing universe. There are
plenty of low risk options out there that could be great picks in
Q2, and especially for investors willing to search for
interesting choices in the ETF world.
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VANGD-SHT TRM B (BSV): ETF Research Reports
ISHARS-BR 1-3CB (CSJ): ETF Research Reports
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PWRSH-DB US$ BU (UUP): ETF Research Reports
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