McCall’s Call: ETFs For 2011, Part II

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It's time for the second part of my 2011 outlook. The first half gave a brief introduction to the strategy behind picking the top 10 ETFs for the upcoming year, and I gave you the first five ETFs on my list. The second five are listed below, complete with the reasoning behind each ETF.

Matthew D. McCall You'll recognize some as the usual suspects -- notably precious metals, the emerging markets and technology.

Other parts reflect growing concerns about rising indebtedness in the U.S., as the government continues to try to kick-start a sluggish economy by flooding the markets with cash. In other words, 2011 may be a good time to short bonds, and I'll steer you toward an ETF that can do that for you.

But just because the Treasurys market may be due for a correction doesn't mean investors should shun other parts of the bond market. I favor high yield debt, and I'll tell you why I like the SPDR Barclays Capital High Yield Bond ETF (NYSEArca:JNK) in particular.

So without further ado, let's get into it.

Precious Metals

The precious metals have a number of factors that could help fuel the sector to even higher prices in the coming year. A weak dollar, inflation, and the fact that precious metals are becoming a permanent asset class are three major reasons I think both gold and silver can continue to hit new highs in the New Year.

Even though the SPDR Gold ETF (NYSEArca:GLD) remains my firm's largest holding, I feel silver has more upside potential than gold and the miners should give more leverage to investors that can handle the extra risk with the mining ETF.

My play on the sector is the Global X Silver Miners ETF (NYSEArca:SIL), which invests in a basket of 25 silver mining companies, mainly in Canada and Mexico. The U.S. makes up just 9 percent of the overall allocation. The annual expense ratio is 0.65 percent.

Emerging Markets

The emerging markets constitute one of my favorite investment themes, not only for 2011, but for the next several decades as well.

As countries such as China, Brazil, and India continue to accumulate wealth, it will be passed along to growing middle classes that will have significant disposable income for the first time. This new middle class will become sought-after consumers who will spend large amounts of money in the local economies.

To play this trend,  I like the EG Shares Emerging Markets Consumer ETF (NYSEArca:ECON). The ETF focuses on sectors such as automobiles, food and beverages as well leisure. All three are areas that will do well as all this new disposable income gets spent. The top five countries in the ETF are Mexico, Brazil, South Africa, India, and China. The fund has a total of 27 stocks, and the annual expense ratio is 0.85 percent.

Technology

Within the technology sector, several niche areas have stood out as recent winners, and I believe that trend will continue into 2011. Software companies are among the winners that been able to beat the market as well as peers in the tech sector.

The reasoning behind this trend is the move towards greater production with fewer employees. Basically software allows a job to get done more efficiently with less overhead on the books, resulting in a larger bottom line.

Another bonus is the exposure the sector gives investors to the "cloud computing" phenomenon that I believe is an area you must own in the coming years. My pick for the sector is the iShares S&P North America Software ETF (NYSEArca:IGV). The ETF is composed of 54 stocks and has an annual expense ratio of 0.48 percent. Investors get exposure to the large-cap software names such as Oracle ( ORCL ) and Microsoft ( MSFT ) as well as lesser-known companies that specialize in cloud computing.

Preparing For Higher Rates

As the government continues to print more and more dollars and demands more money from foreign governments to pay for our debt, one of the end results will be higher interest rates.

The 30-year Treasury bond has already seen its yield rise from 3.46 percent in August to 4.6 percent in mid-December. I think there's more upside for the yield of the long bond, so bond prices will fall.

To take advantage of this trend investors can turn to the Proshares Short 20+ Year Treasury ETF (NYSEArca:TBF). The ETF seeks the inverse of the daily return of the Barclays Capital 20+ Year US Treasury Index. So, if the index falls, the ETF is likely to rise. I say "likely" because the ETF rebalances daily, and returns can vary from those of the index -- sometimes significantly -- depending on how the selling plays out.

While TBF should thus be monitored closely, just as ProShares says on its website, it adds diversification to a portfolio and helps give investors exposure to a major investment theme. TBF has an expense ratio of 0.95 percent.

High-Yield Debt

As I'm sure you've guessed by now, I think being underweight government bonds is a good idea in the coming year, because as yields increase bond prices will fall. Letting the coming correction erase some of the sharp gains bonds have posted since the market crashed more than two years ago would be a real shame.

While the danger of a correction lurks in corporate bonds as well, I wouldn't throw the baby out with the bathwater.

The one fixed-income ETF to make the cut is the SPDR Barclays Capital High Yield Bond ETF (NYSEArca:JNK). It invests in high-yield corporate bonds that are below investment-grade status -- junk bonds, to make it plain.

JNK inhabits a sub-sector of the bond market that has faired much better than its peers. I believe that its outperformance will continue and, with a dividend yield of 8.5 percent, JNK offers both upside potential and income. Its expense ratio is 0.40 percent, and I suggest owning JNK in a tax-deferred account due to the monthly taxable dividends.

Use Mental Stop Losses

That wraps up the top 10 ETFs for 2011. Keep in mind that 12 months can be a long time in the world of investing, and that unknown factors could change my views dramatically.

That's why I suggest you always use what I call mental stop-loss orders to protect against any big moves down. What that means is that instead of using a traditional stop-loss order placed with your brokerage firm, pick a price, and if the ETF closes below it, sell the next day.

The reason for this strategy is based on intraday volatility that could flush you out of a position due to a huge swing in the market. Remember the "Flash Crash" earlier this year? The meaning of unprecedented volatility shifted on that day.

I also suggest you continue reading my "McCall's Call" column here on Indexuniverse.com, which will insure that you keep an up-to-date sense of my view on the market as the year moves along. And on that note, Happy New Year!

Matthew D. McCall is editor of The ETF Bulletin and president of Penn Financial Group LLC, a Ridgewood, N.J.-based wealth management firm specializing in investment strategies using ETFs.

Don't forget to check IndexUniverse.com's ETF Data section.

Copyright ® 2010 Index Publications LLC . All Rights Reserved.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs

Referenced Stocks: IGV , MSFT , ORCL , SIL , TBF

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