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.
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
So without further ado, let's get into it.
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
The emerging markets constitute one of my favorite investment
themes, not only for 2011, but for the next several decades as
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.
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
) and Microsoft (
) as well as lesser-known companies that specialize in cloud
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
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.
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
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
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
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