The market has hit the âresetâ button over the last month
and is now officially in correction mode after the first downgrade
of U.S. debt in history. The somewhat expected downgrade S&P
last Friday sent world markets to new 2011 lows and well off the
multi-year highs set earlier this year.
The sudden and dramatic selloff in nearly every asset class, except
Treasurys, might be the start of a new bear market or the best
buying opportunity of the year. I tend to lean towards the latter,
and therefore feel itâs appropriate to look at ETFs that could be
used to build a portfolio.
Iâll assume for the purpose of this discussion that an
investor is new to the market, so the goal is to build an all-ETF
portfolio from the ground up. And what better time to do this than
after stocks have fallen more than 10 percent from their recent
highs. So, Iâll highlight the 10 ETFs I think are now cheap and
good long-term investments.
Some parts of the economy are going to do better than others,
and luckily for ETF investors there are easy ways to gain exposure
to those trending or dependable areas, such as healthcare.
- Take the iShares Dow Jones U.S. Pharmaceuticals ETF
(NYSEArca:IHE). Itâs composed of 39 U.S. drug stocks, with a
heavy concentration on the large-cap sector. The top 10 holdings
make up about 58 percent of the entire ETF, with Johnson &
) and Pfizer (
) the top two holdings. IHEâs nearly 20 percent pullback in a
month from an all-time high has created an attractive entry level
for long-term investors. It has a 0.47 percent annual expense
ratio and a dividend yield of 1.3 percent.
- The SPDRs Select Sector Utilities ETF (NYSEArca:XLU) is a
dividend play too, but itâs also an ETF that should outperform
the market during times of extreme volatility and selling. It is
made up of 35 utility stocks, mainly electric utilities that are
based in the U.S. Its low expense ratio of 0.20 percent and an
above average dividend yield of 4.4 percent make the ETF even
more compelling to long-term investors. And, more to the point,
while XLU recently hit a fresh 52-week low, it has held up better
than many of its peers.
- The First Trust ISE Cloud Computing ETF (NYSEArca:SKYY),
launched in July, is a newcomer to the world of tech ETFs. It is
made up of 40 stocks that are either directly involved in the
cloud computing business or have indirect ties to this
information-technology niche. While SKYY has experienced a rough
first month given all the selling, I think this sector is likely
to produce many of the next great technology stocks. Buying into
the current weakness and building a position is my
recommendation. The ETF has an expense ratio of 0.60
- Oil is another area worth looking at closely. I like the IQ
Global Oil Small Cap ETF (NYSEArca:IOIL), the first and only ETF
to concentrate solely on small-cap names within the energy
sector. The ETF began trading in May of this year and has taken a
big hit recently due to the drop in the price of oil. That makes
it attractive. With 64 stocks and less than 50 percent of them in
the U.S., the ETF offers diversity for those investing in the oil
industry. I chose IOIL as a way to access the energy sector
because, historically, small-cap energy stocks have tracked the
price of oil most closely. I think $80 per barrel oil is a
bargain, and my firm is recommending IOIL as the way to play
rising oil prices. The expense ratio is 0.75 percent.
A boom in commodities is starting its second decade about now,
so I view any pullbacks in materials, whether industrial or
agricultural, as an opportunity to buy a hot asset class at bargain
Even though many believe the commodity bull market is getting
long in the tooth, several macroeconomic factors are still in place
for the trend to continue.
- I have a few commodities-related securities on my radar
screen, including the iPath Dow Jones-UBS Grains ETN
(NYSEArca:JJG). It reflects the returns of an investment in the
futures contracts of three grain commodities:corn, soybeans, and
wheat. I like JJG, and am recommending it, based on increasing
global demand in the coming years at a time when supplies are
struggling to keep up. Itâs a play on a weak dollar too, as
most commodities are priced in dollars,
and it offers portfolio diversification as well. The expense
ratio is 0.75 percent.
- Another commodities ETF I like is the iShares Gold Trust
(NYSEArca:IAU), which tracks the day-to-day price of gold
bullion. IAU has actual physical gold backing up the shares in
vaults around the globe. Its expense ratio is 0.25 percent, lower
than any other physical gold ETF on the market. IAU and its more
well-known competitor, the SPDR Gold Shares (NYSEArca:GLD), are
up 26 percent in 2011 as gold reaches historic highs. Gold ETFs
are my firms largest holding, and we like it going forward. That
said, I donât recommend buying at the highs. Look for weakness
on IAU around a price of $16 area. Itâs now trading just above
$17 a share.
A major part of the commodities boom is the demand pull from
rapidly developing countries, such as Brazil, India and especially
- An ETF that goes to the heart of that development story is
the EG Shares Dow Jones Emerging Markets Consumer ETF
(NYSEArca:ECON). Itâs composed of 30 stocks in the consumer
goods and services sectors within emerging market countries. They
include retailers, food & beverage, automakers, media, and
more. Mexico makes up 20 percent of the ETF, followed by Brazil,
South Africa, India, and Chile. This ETF is truly a pure-play on
the emergence of middle classes in the emerging markets. As
wealth is created, the demand for goods and services will
increase, benefiting this ETF. The expense ratio is 0.85 percent.
After hitting a new high in July, the ETF has fallen on rough
times, and is thus again a buying opportunity.
- The EG Shares Emerging Markets High Income Low Beta ETF
(NYSEArca:HILO) is a new ETF that is designed to offer a greater
dividend yield and lower relative volatility than the MSCI
Emerging Market Index. The ETF is composed of 30 stocks with
Malaysia (18 percent) and South Africa (17 percent) the two
largest countries in the allocation. HILO has a 0.85 percent
expense ratio, and the index has a dividend yield of 5.5 percent.
I view this ETF as a new and exciting way to invest in the
emerging markets for investors seeking lower risk and
Dependable fixed-income ETFs are essential to any credible asset
allocation plan, and I have a couple that I often recommend.
- To regular readers of this column, youâll recognize the
SPDR Barclays High Yield Bond ETF (NYSEArca:JNK), which I mention
quite a lot. JNK is composed of over 600 individual corporate
bonds that are rated below investment grade. The current yield on
the ETF is 8.5 percent and its expense ratio is 0.50 percent. The
junk bond sector took a big hit during the recession, but since
the bottom it has been a top performer with a large yield.
However, the bottom was once again pulled out from under it in
all the recent selling. It has lost 10 percent in less than a
month. In my opinion, the pullback has created a great buying
opportunity for investors looking to gain exposure to fixed
income with above-average risk and above-average yields.
- Another prospective fixed-income ETF is the Market Vectors
Emerging Markets Local Currency Bond ETF (NYSEArca:EMLC). It
contains a variety of bonds issued by developing countries and
denominated in local currencies. By investing in the local
currency, investors will either benefit or suffer from currency
fluctuations. That said, my view is that the dollar will continue
to fall and therefore the conversion in funds like EMLC will
benefit U.S. investors. The current yield is 6.2 percent and it
has a net expense ratio of 0.49 percent. As Iâve been saying,
buying into recent weakness is a good strategy to begin building
I consider the 10 ETFs above to be great starting points for the
average investor who has at least 10 years until retirement.
Anyone nearing retirement may want to consider a more
conservative allocation, perhaps one with an overweight of bonds
that are due to mature sooner rather than later.
That said, we all have different risk levels and goals, and
therefore individual investors should consult an advisor before
making any decisions. Also, in the spirit of full disclosure, we
currently own shares of JNK, ECON, IAU, JJG, and IHE.
Matthew D. McCall is editor of The ETF Bulletin and president
of Penn Financial Group LLC, a New York-based wealth management
firm specializing in investment strategies using ETFs.
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