If you were stranded on an island and could only have four
next year, which would they be? Several stock market strategists
share their top ETF sector investment ideas for 2013.
Jeremy Held, director of research at ALPS Advisors in
Denver, with $7.6 billion in assets under management:
Energy Select Sector SPDR (
The combination of strong fundamentals, abundant overseas
exposure and historically low valuations should make energy the
best performing sector in the market.
With a price-to-earnings ratio of 11, energy is now the
cheapest sector in the S&P 500. Brent crude oil, the most
reliable global benchmark for supply and demand, is currently
trading at $107 a barrel. This is the highest calendar year-end
price in history. It's 10% higher than it was in 2007, the last
time energy stocks led the market higher.
While Brent has steadily risen in price, OPEC spare capacity,
at 2%, has dropped to its lowest level since 2008. Considering
that rising prices and falling capacity are coming on the heels
of the worst global financial crisis in generations, even a small
uptick in global gross domestic product could result in higher
oil prices and higher profits for energy companies.
No other sector generates more of its profits overseas than
energy. This is particularly important in light of how expensive
U.S.-focused companies are relative to their multinational
Historically, investors have paid as much as 50% higher
multiples for companies with global operations, but this figure
has dropped to 10% since 2001. As a result, multinational
companies, especially energy companies, will likely outperform in
a global market rally.
The top holdings, Exxon (
) andConoco Phillips (
), can both benefit from global growth and are uniquely
positioned vs. foreign multinationals to capitalize on the recent
surge in U.S. oil production.
Vahan Janjigian, chief investment officer at Greenwich
Wealth Management in Greenwich, Conn., with $1.2 billion under
Vanguard Information Technology ETF (
I am finding excellent value in the technology sector
primarily because there are a number of large-cap technology
stocks that generate strong cash flow, pay decent dividends and
are not too overpriced.
The weighted average price-earnings ratio (based on trailing
earnings) for VGT was 16, a bit higher than the 15.8
price-earnings multiple for the S&P 500. VGT's weighted
average price-book ratio was 3.0 vs. 2.1 for the S&P 500, as
of 11/30/12. VGT's earnings growth rate was 26.9% vs. 9.9% for
the S&P 500.
A few key stocks in this sector have even suffered sell-offs
in recent months, making this a particularly good time to get
into this sector.Apple (
), a prime example, is down almost 30% from its Sept. 19 closing
high. I'm betting that at least some of the selling is due to an
anticipated increase in capital gains tax in 2013.
If I am correct about this, the stock should stage a strong
rebound in early 2013. VGT has more than 20% of its assets
invested in Apple.Qualcomm (QCOM), an Apple supplier with strong
revenue growth and a history of increasing dividends, is also a
top-10 holding in this fund.
Charles Sizemore, founder of Sizemore Capital in Dallas,
with $10 million in assets under management:
JPMorgan Alerian MLP ETN (AMJ).
The combination of higher volumes of domestic oil and gas
being pumped and the loosest monetary policy in history should
make mid-stream master limited partnerships one of the safest
bets for 2013.
MLPs can be somewhat tricky to value as their earnings and
book value are often distorted by large depreciation charges. A
better way to value them is by the yield spread between MLPs and
competing investments, while looking at the growth rate of
distributions and the distribution coverage ratio as gauges of
After its management fee, AMJ yields 5.1%. This is a healthy
spread overUtilities Select SPDR's (XLU) dividend yield of 4.1%,
the 2.0% paid by the S&P 500 or the pitiful 1.8% paid on
10-year Treasury notes. The historical spread between the MLP
index and the 10-year Treasury is 2%-2.5%, and we're currently
above that range by a fair margin.
Some individual MLPs carry a degree of energy price risk. But
most of the larger-cap players that dominate the Alerian index
are in the midstream segment and assume less price risk. They
essentially act as toll roads that collect on the volume
The whole MLP sector took a beating after the election due to
fears of higher taxes coming. The tax-loss selling should have
mostly run its course.
As with dividend paying stocks, there is often a trade-off
between high current yield and prospects for growth. Higher
yielding MLPs often have low expected distribution growth. I
recommend holding MLPs for the duration of Bernanke's "QE
Infinity." For risk management, consider a 15%-20% trailing
Alan Brochstein, principal of Invest By Model in
Market Vectors Gold Miners ETF (GDX).
GDX has had a rough 2012, declining in value by 11%, despite a
modest 6.4% advance in the price of gold and a 16% advance in the
S&P 500. This poor performance is nothing new, as the ETF has
been flat for the past five years, about the same as the S&P
500, despite gold's price almost doubling.
Gold stocks have lagged the price of gold because of an
investor preference for one of the largest and most liquid ETFs
available:SPDR Gold Trust (GLD).
Profits for companies in GDX have been hurt by high labor and
energy costs, leading to a modest 12% decline in earnings in 2012
despite 7% sales growth. Earnings in 2013 are projected to rise
39% year over year, according to Thomson Reuters' Baseline.
If gold prices flatten or fall moderately, GDX could still
fare well because it's trading at historically low valuations.
GDX currently trades at 1.6 times book value, well below its
five-year average of 2.6 times. It has a price-to-forward
earnings ratio of 10.5, well below its five-year average P-E of
By contrast the S&P 500's current 13.5 P-E ratio is just
slightly lower than its 14.6 five-year average. GDX sports a
five-year earnings growth rate of 50% vs. 9% for the S&P 500.
The three largest holdings, which account for about a third of
the ETF's assets, have P-E ratios ranging from 7 to 13.
Additionally, many of the stocks are now paying dividends,
some linked explicitly to the price of gold. The ETF yields a
fairly generous 1.5%, as of Nov. 30.
Valuations are cheap enough that it could perform reasonably
well in the muddle-along economic scenario, but it might do
exceptionally well should the economy pick up beyond expectations
and trigger fears of inflation.
If gold prices rise, I expect GDX to produce high returns as
investors look to hedge inflation risk. Rising earnings and
dividends could lead to very strong investor demand.