If you were stranded in a
pit and could have only one ETF in the third quarter, which would
Here's what a group of asset managers and investment
strategists are recommending for
1. Jeff Vollmer, managing principal at Hyde Park Wealth
Management in Cincinnati, Ohio, with $240 million in assets under
IShares Dow Jones U.S. Regional Banks Index (
) presents a powerful case to forward-looking investors, offering
positive valuations and the ability to climb the wall of worry in
a rising-interest-rate environment.
Companies in IAT can increase profits in such an environment.
The Federal Reserve has stated its intention to hold short-term
interest rates near zero until inflation reaches 2% or the
unemployment rate reaches 6.5% or less. Most economists believe
these targets could take a year or two to achieve. Meanwhile,
long-term rates will increase as the markets expect better
economic growth in the years ahead.
As rates creep higher, regional banks continue to pay nearly
nothing to customers' savings accounts, even as the banks begin
to make considerably more on their commercial loans and
mortgages. This disparity between what they pay and what they
make is called their "net interest margin." NIM works as a proxy
for bank profitability.
Rising rates and an improving real estate market can serve as
a catalyst for potential homebuyers, who choose to buy sooner
than later in order to avoid future rate increases. Banks benefit
by increased lending volumes as well as bigger bank deposits, as
people save more money in interest-bearing savings accounts as
opposed to allocating capital to riskier assets.
Many, if not most, regional bank stocks remain roughly 50%
below their 2007 prices. But they have recently begun to
appreciate as the specter of rising interest rates takes
IAT offers significant upside from a historical price and a
current valuation perspective. It reached 53 in 2007. Today, it
trades 44% below its 2007 high. The S&P 500 trades at a
price-earnings ratio of 15, while IAT trades at a considerable
discount of 13 times forward earnings.
Should markets get volatile, or if the economic data begin to
sour, regional banks could sell off. Like any position, IAT
should represent no more than 3% to 5% of any portfolio.
2. David Brown, chief market strategist, Sabrient Systems in
Santa Barbara, Calif.:
First Trust Nasdaq Technology Dividend TDIV Index (
To the surprise of many investors, technology stocks have seen
higher growth of dividends over the past 10 years than any other
sector. According to Nasdaq OMX, dividends in the tech sector
have had the highest annualized growth of 24.27% per year over
the past 10 years. Oil and gas stocks have had only 12.75%, and
utilities just 7.52%.
The forward price-earnings ratio is another consideration. The
average forward P/E of the stocks in TDIV is in the lowest 8% of
all P/Es in traded
. So clearly they are not overvalued at this point. It has not
been a particularly good year for tech stocks (Apple (
), for example), but because of TDIV's low forward P/Es, the odds
are that not only are the dividends likely to grow but the stock
prices should increase too.
TDIV has 74 constituents and over $150 million in the trust.
TDIV is made up of 80% technology stocks and 20%
telecommunication stocks. The stocks are selected on the basis of
dividends (using a dividend-weighted formula). The higher the
dividend paid, the higher the weighting given the stock in the
TDIV ranks in the top 93% of the market based on return on
sales, return of equity and return on assets for each constituent
of the ETF.
Technology stocks in general could continue to underperform
the market. But I don't think this is likely because of the
simple fact that for many, many years technology has been among
the fastest-growing sectors. There's no reason technology won't
be able to cast off the current gloom and return to strong
growth, as advances continue throughout the tech industry, such
as cloud computing, enterprise software, broadband as Internet
users expand, semiconductors, and areas that are not yet a
glimmer in our collective minds.
Even if technology stocks continue to underperform, that
should have little or no effect on the dividends. In general,
tech companies -- and especially those in TDIV -- have enormous
amounts of cash, so there is little risk of not being able to
cover dividends. Keep in mind that the dividends paid by
utilities are often close to the amount of their earnings. With
tech stocks, it's just the opposite.
For all these reasons, we recommend taking a hard look at TDIV
as a good investing idea.
3. Michael Needleman, senior partner at Fusion Analytics
Investment Partners in New York, with $500 million in AUM:
First Trust NYSE ARCA Biotech (
Morningstar considers FBT a growth ETF that is 100% invested
in health care, with over 80% of the allocation in biotech, 10.3%
in health care products and 9.4% in pharmaceuticals. Stocks in
the ETF have an average price-earnings ratio of 20.76 and an
average price-to-sales ratio of 3.14.
The top 10 holdings areIllumina (
),Affymetrix (AFFX),ImmunoGen (IMGN),Regeneron (REGN),InterMune
(ITMN),Sequenom (SQNM),United Therapeutics (UTHR),Nektar
(NKTR),Biogen (BIIB) andAlexion Pharmaceuticals (ALXN).
A majority of the companies in FBT are domestic, so the
overall global economy should not affect this ETF. The larger
biotech names have a number of new drugs on the market that can
continue to drive stocks higher. Consolidations, or mergers and
acquisitions, of biotech companies are likely to continue. The
main risk is that biotech stocks in general are volatile.
We recommend placing a stop loss at 54, which is the 100-day
4. Jonathan Citrin, executive chairman of CitrinGroup in
Birmingham, Mich., with $60 million in AUM:
IShares MSCI Brazil Capped Index (EWZ)
Having lost already almost half its value in 2013, the equity
market in Brazil continues to receive negative glances. What was
just a few years ago the golden child of portfolios has quickly
been abandoned as most have looked toward the U.S. and other
developed nations for near-term growth.
The economy of Brazil is a major benefactor of export growth.
EWZ is a potential bargain because it currently trades at levels
not seen since the Great Recession of 2008. Whether due to
increased demand from abroad, especially for natural resources,
stimulus from within or simply the desperation of investors
looking for opportunity amid central bank tightening elsewhere,
Brazil is well-positioned for a run in the third quarter.
It may be a hair early, and the true bottom is almost always
unknown. But the powerful economy of Brazil will play more than a
supporting role in the shaping of our global economic future. For
those lacking exposure or waiting for a signal, now is the time
to get into this emerging and potent economy.
5. William Harris, managing member at WH Cornerstone
Investments in Duxbury, Mass., with $40 million in AUM:
WisdomTree Europe Hedged Equity (HEDJ)
Most foreign stock and bond indexes have fallen even more than
the U.S. markets. In general, the selling pressure has been
heavier abroad than in the U.S. Even so, my top ETF pick for the
third quarter is a bit contrarian. Since all markets appear a bit
squirrelly, I feel safe holding true global powerhouses,
companies likeAnheuser-Busch InBev (BUD),Sanofi-Aventis
(SNY),Unilever (UN),Siemens (SI),Daimler (DDAIF),Banco Santander
(SAN) and Bayer.
Many of the world's leading brands are headquartered in
Europe. They are global companies that generate tons of revenue
from Europe and countries outside the eurozone. These companies
are solid. I anticipate exports, and ultimately earnings, to
increase in the second half of the year. Geopolitical news and
looming sovereign defaults will haunt European stocks for the
The biggest risk of investing in Europe is the euro. HEDJ
gives exposure to truly great global companies, while hedging
exposure to the euro. HEDJ neutralizes exposure to currency
fluctuations between the euro and the U.S. dollar. Ignoring the
local currency can turn a good investment into a bad one. With
HEDJ, you can ignore the currency risks.
HEDJ is made up of the largest dividend-paying companies that
are domiciled in Europe and are traded in euros.
6. Michael Bapis, partner and managing director of the Bapis
Group in New York, with $850 million in AUM:
Given the recent market pullback, we would use this time as an
opportunity to slowly add to growth and value large-cap equities.
Short term, we will have continued volatility and an overly
sensitive environment, but longer term we would look to own
high-quality equities and we remain bullish. In the coming weeks,
the volatility may be extreme and markets highly sensitive, but
large-cap equity remains undervalued.
While we navigate through an extremely difficult interest-rate
environment, large-cap stocks still have low prices relative to
earnings as well as high dividend yields, which investors are
The rapid rise in interest rates is a sign of an improving
economy. The tapering of the Federal Reserve's purchases and most
recent employment numbers signify this, as well.
We are most optimistic on technology. Recently, large-cap tech
companies have been beaten down. Across the U.S., many businesses
are beginning to upgrade equipment and infrastructure, which will
lead to better-than-expected revenue numbers for the sector.
7. Jackie Ann Patterson, founder of Backtesting Report in
IShares Russell 2000 Index (IWM).
I look at roughly the past six months' performance of several
ETFs representing U.S. stocks, U.S. bonds and international
stocks. Historical backtesting has shown that choosing to invest
in the ETFs with the largest percentage gains has led to profits
-- at least when applied to ETFs that track broad stock and bond
indices. "Heat-chasing" the latest short-term run-up in a
narrowly defined sector too often ends in failure.
IWM has been leading the other index ETFs throughout the year.
IWM appears poised to lead going forward as well, as bond returns
are negative. The international funds were hurt by the rise of
the dollar, and the large-cap indices trail lately. IWM is up 20%
over the last 140 trading days.
IWM invests in up-and-coming small-cap stocks such asAegerion
Pharmaceuticals (AEGR), which gained 137% since the beginning of
2013. The small-cap domain also includes beaten-down players such
asKB Home (KBH) andCoeur D'Alene Mines (CDE), which could make a
comeback in a strong market.
With 2,000 companies in the index, a single company's meltdown
is not likely to do much damage to IWM.
The third quarter always carries the risk of the summer
doldrums, when market players seem to take a holiday and let the
prices sag. Small-cap indices tend to be more volatile, so broad
market pullbacks could be more pronounced for IWM. If the
trailing six-month performance of IWM were to drop to a loss, I
would revise my position in IWM.
8. Kevin Rich, founder of Rich Investment Solutions in New
York, with $5 million in AUM:
ALPS U.S. Equity High Volatility Put Write (HVPW) .
Recently, investors have become nervous, disquieted by Fed
talk and uncertainty about the continuation of quantitative
easing and the strength of the economy. Equity markets have
become unsettled as exhibited by increased volatility. In this
environment, the preferred investment is one that is able to
behave defensively while allowing the investor to still
participate in an increasing equity market.
HVPW is an income-generating fund that creates its income by
selling two-month 15% out-of-the money put options on a selection
of 20 diversified stocks that have the highest implied
HVPW can be viewed as a "low" volatility strategy. Despite the
fact that HVPW sells put options on some of the highest
volatility stocks, the fact that it sells options on a
diversified selection of 20 large-capitalization stocks with
strike prices that are 15% out of the money allows HVPW to
experience lower volatility than the broad market. HVPW can be
viewed as a defensive long-equity position, while generating
relatively high income.
Selling options is a very popular and effective way to
generate income in the equity markets. Many investors are
familiar with selling call options on a stock they own, which is
called "covered call writing."
Selling put options collateralized by T-bills is not as
well-known a strategy as covered call writing, but "put writing"
offers the same benefits plus distinct advantages over call
writing, such as the ability to provide additional downside
protection and the ability to generate income from the collateral
HVPW should perform well in upward-trending and
sideways-trading markets, and may perform better than the broad
market equity funds in downward-trending markets because of the
downside protection it provides. In extreme bear markets, HVPW
will probably perform poorly just like the broad market equity
funds but with some downside protection.
9. Adam S. Drake, partner at Highland Investment Advisors in
Milwaukee, Wis., with $30 million in AUM:
IQ Merger Arbitrage ETF (MNA)
A merger arbitrage or "MA" strategy may provide an attractive
alternative to bonds in a rising-interest-rate environment. MA is
an investment strategy employed by hedge funds in which they
simultaneously buy stock in a company for which an acquisition
has been announced and short the stock (or a proxy for the stock,
e.g., an index fund) of the acquiring company.
MNA offers investors a noncorrelated risk reduction asset for
their portfolio. Do not expect exciting returns; the fund's
objective is to dial down the overall risk of a portfolio through
diversification and noncorrelation to stocks and bonds.
For example, for the 10 years ending March 31, 2013, the HFRI
Merger Arbitrage Index had a correlation of 0.67 to the S&P
500 Index and 0.07 to the Barclays U.S. Aggregate Bond Index. The
Merger Arbitrage ETF does not produce income.
MNA is not a pure MA strategy as it uses the overall market as
a short proxy instead of the acquiring firm. The return generated
for the investor is the spread. The spread is determined by the
risk-free rate (short-term Treasury Bills) plus a risk premium.
The risk premium is based on several factors, one being the
probability of whether or not the deal will come to fruition.
Examining historical HFRI MA index data, returns were
generally higher for the MA strategy in the 1990s, when interest
rates were higher.
Returns moderated through the 2000s in tandem with falling
With current interest rates at or near zero -- specifically
short-term Treasuries -- MA returns are almost entirely
attributable to risk premium. Should interest rates rise, so too
should MA returns.
MNA is a small ETF with thin trading volume and a relatively
short track record. Alternately, there are several mutual funds
using the MA strategy with longer track records that an investor
could consider. Also, if interest rates go down or stay flat, the
fund's performance could be flat or down. The fund can be
concentrated, and thus nondiversified. Returns are somewhat
dependent on the overall health of the MA market. Deal volume may
go down, and those deals that are announced could be canceled or
10. Will Rhind, managing director of ETF Securities in New
York, with $20 billion in AUM:
ETFS Physical Platinum Shares (PPLT)
PPLT tracks one of the few commodities in which demand is
currently outstripping supply. The main source of demand for
platinum is in catalytic converters, which clean exhaust
emissions on vehicles. Global auto sales have been steadily
increasing in the last few years since reaching a bottom during
the global financial crisis of 2008. Global vehicle sales
increased 5% in 2012 to approximately 81 million units.
Platinum also has strong demand from the jewelry industry,
particularly for wedding bands and other high-end designs.
Platinum jewelry demand in China rose to near record levels in
2012 as the platinum price traded at a discount to gold for a
large part of the year. Rapidly improving global lifestyles
coinciding with increasing demand for motor vehicles and
additional emission regulations are likely to sustain strong
underlying demand for platinum in the years to come.
About 80% of the platinum in the world is produced in South
Africa, which amounts to a huge concentration risk for global
supply of the metal.
As platinum is more of an industrial metal, the main risks to
the price of platinum in the near term would be a significant
slowdown in global gross domestic product and subsequently global
PPLT tracks the spot price of platinum and is backed by
physical platinum bullion in a secure vault.
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