Some of the headlines say September could be the worst ever
given all of the uncertainties springing from Syria, the
Federal Reserve and congressional budget debates.
We asked ETF investing strategists to share their best
investments idea for the final stretch of the year.
1. Reed Eckhout, market analyst at CitrinGroup in Birmingham,
Minn., with $60 million in assets under management: PowerShares
KBW Bank Portfolio ETF (
Expectation that the Federal Reserve will reduce Treasury and
MBS (mortgage-backed securities) purchases have produced
volatility -- especially in interest rates across the globe and
the U.S. Historically, an environment of increasing interest
rates coincides with poor performance in fixed income and a
difficult environment for equities because corporations have to
pay higher rates on newly issued debt.
However, unlike most corporations, banks tend to perform well
in a rising rate environment. They borrow at low, short-term
rates and lend at higher, long-term rates. And as interest rates
rise, their profits increase from the widening spread. The
Federal Reserve has stated that the discount rate will remain
near zero until unemployment and inflation targets are met, which
may not be until around 2015.
Even though financials have had a solid rally this year, they
are still in the early innings of their full potential
performance. U.S. financials just finished the second-quarter
earnings season with 79% of companies beating expectations -- the
highest rate among all sectors. They also enjoy the best earnings
growth rate, 28%, among all sectors. Financials are trading at 12
times forward earnings estimates, while the S&P 500 trades at
Additionally, they're benefiting from improving credit
conditions, improving gross loan growth and near-record capital
ratios. Investment risks include exposure to Europe, new reforms
or regulation and lawsuits.
KBWB is a concentrated, 24-company bank ETF that provides
exposure to large and midcap value and growth stocks. It is based
on the KBW Bank Index and is a float-adjusted,
capitalization-weighted index. The ETF is comprised of the
leading national money center banks and regional thrifts. Its top
five holdings areCitigroup (
),JPMorgan Chase (
),Wells Fargo (
),Bank of America (
), andSunTrust Banks (STI).
2. Neena Mishra, Research Director at Zacks Investment
Research in Chicago:Industrial Select Sector SPDR (XLI).
U.S. manufacturing activity has been quite upbeat of late, as
manufacturers have been expanding production and adding jobs in
response to the increased demand.
Many believe that the country is on the verge of a
manufacturing "renaissance," thanks mainly to lower energy
prices, improving technology and rising labor costs in developing
economies. Critics, on the other hand, point out that the
manufacturing output in the country is still much lower than the
beginning of the recession.
According to a recent report from the Boston Consulting Group,
the U.S. is fast becoming one of the lowest-cost countries for
manufacturing in the developed world. Per BCG, average production
costs in Germany, Japan, France, Italy and the U.K. will be 8% to
18% higher than those in the U.S. by 2015.
While there may be disagreements as to whether the rebound in
manufacturing seen since 2010 is just a cyclical recovery or a
structural turnaround, there is no doubt that the recent
manufacturing data in the U.S. as well as in Europe and China,
suggests a strong uptrend.
The manufacturing sector has benefited from the housing market
recovery, which has resulted in increased demand for furniture,
appliances and wood products. Rising consumer confidence and a
healing labor market have also boosted the demand for
These factors in turn have been able to offset the headwinds
generated by slow global economic activity and effects of the
sequester. Per Zacks estimates, industrials sector earnings will
grow by 12.0% in 2014, sharply up from just 1.3% in 2013.
XLI currently holds 63 stocks, mostly large and liquid
companies.GE (GE) is the largest holding, weighted at 11.5% of
In terms of sector exposure, aerospace and defense (26%),
industrial conglomerates (19%) and machinery (19%) take the top
three slots. Most aerospace and defense companies reported
excellent results for the second quarter, defying sequester woes.
Rising geopolitical risks may further support defense stocks.
On the flip side, if the U.S. economic growth falters in the
coming months, due to rising interest rates or the looming budget
battle, industrial stocks may be affected. Also, this sector in
general is more volatile than the broader market.
3. Doug Fabian, president of Fabian Wealth Strategies in Costa
Mesa, Calif., with $100 million under management:PowerShares CEF
Income Portfolio (PCEF).
Most investors are fleeing fixed income in droves. Fear of
further rate rises once the Fed announces its plans for bond
purchases is everywhere. Its time to be a contrarian as the peak
in rates may be this month.
PCEF is comprised of 146 income-producing closed-end funds. It
has an enticing yield of 7.7%, generated from its investments in
a combination of high-yield, investment-grade, fixed-income and
equity-option income strategies. What makes this fund so
compelling at this time are three factors.
1) We have had a huge move up in yields, causing the value of
bonds funds to decline. PCEF has been no exception as its prices
has fallen over 9%, but we believe that the highs in yields could
be reached after the announcement of the Fed plans. Once there is
more clarity, yields will most likely go sideways or down into
2) Closed-end funds trade at premiums and discounts to their
net asset values. Such is the case of the underlying securities
in PCEF. Right now the discounts within the fund are near
historical highs, above 7%, while the historical average discount
3) Sentiment in the bond arena is extremely negative, with
retail investors selling bond funds en mass. In our experience,
retail investors panic near the end of a big move. So now is the
time to be thinking about buying income assets.
One-third of the assets in PCEF are dedicated to generating
income via equity-option strategies. This component should
perform well in the traditionally strong year-end rally.
PCEF is an excellent tool for yield and total return in a
stable or declining-rate environment. It will provide investors
with a monthly income stream as well as price appreciation, even
if rates go sideways because the closed-end funds in the
portfolio are trading at a discount to their net asset value.
If we see heightened concerns for economic growth globally or
a risk event in the Middle East, rates will fall not rise from
these levels. It's time to think outside the box and purchase
this fund after the Fed meeting on Sept. 18th. We do expect this
fund to fall further ahead of the Fed meeting.
4. Scott Martindale, senior vice president of Sabrient
Systems in Santa Barbara, Calif.:
First Trust NASDAQ Technology Dividend Fund (TDIV).
TDIV holds 79 technology and telecom companies that pay a
common dividend, and weights those stocks based on dividend
contribution rather than market cap. So, whereasGoogle (GOOG) is
the third-largest holding in
iShares Dow Jones U.S.
Technology (IYW), it is not even a constituent of TDIV because it
doesn't pay a dividend. Also, whereasApple (AAPL) is by far the
dominant holding in IYW with an 18% weighting, TDIV holds
approximately equal weights (7%-9% range) in Apple,Cisco
(CSCO),Microsoft (MSFT),Intel (INTC) andIBM (IBM).
Stocks in TDIV display a relatively low forward P/E
(price-earnings ratio), a solid long-term projected growth rate
and impressive return ratios. Also, Wall Street analysts have
begun to show enhanced support in the form of positive net
revisions to earnings estimates. In fact, many analysts are
predicting that the lagging performance of the technology sector
makes it poised to lead the next leg of a market rally. Overall,
TDIV scores a robust 99 (out of 100) in Sabrient's Outlook
Although TDIV has demonstrated a propensity to hold up
relatively well during periods of market weakness, if the market
takes a nasty downturn, TDIV is not likely to hold up as well as
a traditionally defensive sector like consumer staples, or a fund
that pays high dividends, like theAlerian MLP ETF (AMLP).
5. Vern Sumnicht, CEO of iSectors, in Appleton, Wis., with
$145 million in assets under management: SPDR S&P 500Dividend
ETF (SDY) andFirst Trust Value Line Dividend ETF (FVD).
Unless Congress cuts spending, government debt will continue
to increase. This means the Federal Reserve will need to keep
printing money. Since 2009 the Fed has been buying more than half
of this debt. Talk of tapering will only raise interest rates, it
won't stop the Fed's printing. Therefore, the biggest risk for
over the long-term is inflation and rising interest rates.
However, this means opportunities in the short-term. Where
will all this printed money go? Bonds are too overvalued and who
wants to borrow government money for 30 years and get 3.5%?
Then where can billions of dollars get liquidity, safety and
close to 3% dividends? Domestic large-cap value stock funds such
as SDY and FVD, which both focus on strong consistent
Both of the dividend ETFs here are core positions within
iSectors Domestic Equity Allocation, a strategic portfolio of
diversified domestic equity ETFs. The iSectors Domestic Equity
Allocation currently overweights large-cap dividend-focused
In addition, we see the Fed continuing to be accommodative and
the easy-money policies will continue to drive investor demand to
put money to use in equities.
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