As the adage goes, "bull markets climb a wall of worry." The
robust stock market rally this year took the bears, retail
investors and hedge fund managers alike by surprise.
The world's largest ETF,SPDR S&P 500 (
), advanced 16% year to date, while mutual fund investors pulled
money out of stocks in favor of bonds and most hedge funds
underperformed the market.
What should ETF investors do now? We asked several ETF
portfolio managers for their read on the market and their best
ETF investing idea for the fourth quarter.
Matt Reiner, portfolio manager at Wela Strategies in
Atlanta with $1 billion under management:
We remain moderately bullish heading into fourth quarter as we
think that some certainty created by the election coming to a
close will help propel equities to a small rally to end the
Interest rates will remain low for the foreseeable future,
leading investors to continue searching for yield in Q4 and
The one area of the market that seems to be stabilizing and
finally finding a bottom is the real estate market, which has
seen steady improvement thus far in 2012. Through August,Vanguard
REIT ETF (
) has appreciated 16.93% when including dividends. But in a time
when investors are striving for income and with the real estate
market recovering,iShares NAREIT Mortgage ETF (
) seems poised to continue appreciating in Q4.
Along with benefiting from an improved real estate market, REM
carries a trailing 12-month yield in excess of 10%. We believe
that pairing REM with VNQ provides a good allocation to the REIT
space, while also being able to continue earning a stream of
income in this low-rate environment.
Ronald Lang, principal at Atlas Wealth Management in
Philadelphia with $20 million AUM.
As we head into the final quarter of the year, there are three
major concerns for the market: the presidential election, the
"fiscal cliff" and the European debt crisis. All three have
dominated the headlines and have become critical factors in
analyst models in determining the direction of the market.
Better than half of the key analysts we track have forecast a
decrease in corporate earnings and possibly a 2% or less gross
domestic product (growth) in 2013.
If we take the optimistic view on our three key factors and
assume institutions and investors will rally behind the
presidential victor, the fiscal cliff gets resolved within a
month after the election somewhat amicably (at least keeping
dividend tax rate at or around 15%) and Europe begins executing a
plan to keep almost everyone happy and in the euro, the S&P
500 may rally another 5% to 8% to 1500-1540 by the end of this
Another looming factor may be a downgrade on the U.S. debt,
but that is fodder for another conversation, as it will be even
more difficult to forecast how that may impact our markets if the
first three factors are not amicably resolved. Many people will
go to cash if this happens.
So we decided to take the optimistic view. Small caps
iniShares S&P SmallCap 600 Index (
) have consistently beaten the S&P 500 Index over the last
five years and should continue that charge.Vanguard Mid-Cap ETF (
) will benefit greatly from a bullish run.
Keep away from both the small- and midcap ETFs if we do not
get resolution or some keen insight to a resolution on our three
critical factors. These ETFs will fall harder than the large-cap
ETFs and underperform the S&P 500.
Tahar Mjigal, director of risk management at
International Capital Management in Dallas with about $100
Since the June 2012 low, the U.S equity market has experienced
a significant rally fueled by investors' hopes of another round
of quantitative easing (QE3) by the Federal Reserve and further
easing by the European Central Bank. This rally has challenged
many investors that have remained on the side lines for much of
the year in anticipation of a market correction.
Despite what many believe are deteriorating fundamentals,
markets have pushed higher in response to a combination of
worldwide government stimulus and to a lesser extent corporate
stock buyback programs that have significantly increased since
The S&P 500 is attempting to test 1500 -- its high set
back in 2000 -- for the third time. It is approaching the top end
of the range of the secular bear market that started in 2000
despite higher unemployment, larger deficits in developed
nations, uncertainty stemming from the impending U.S. fiscal
cliff, weaker global economic growth, potential Middle East
crisis and the ongoing European debt crisis.
The problems will continue to weigh on the global economy the
next few years. Nothing has changed that would support a market
breakout to the high side from these long-term resistance
For now, however, the market is stable as investors continue
to focus on continued stimulus. Governments and central banks
around the world are doing whatever it takes to stand behind the
In the near term, we expect the S&P 500 to pull back
before moving higher to test the 1500 level early next year, if
the Republicans win (the presidential election).
Certain investments are poised to outperform the market and
provide less correlated returns to the broad market. These
includeiShares Nasdaq Biotechnology (IBB),SPDRs S&P
Homebuilders (XHB),iShares Dow Jones U.S. Healthcare
(IYH),WisdomTree Emerging Market Local Debt (ELD) andiShares High
Dividend Equity (HDV).
We remain defensive and are avoiding small-cap funds and
international developed markets, where we feel the most downside
Kathy Boyle, president of Chapin Hill Advisors in New
To me this seems very much like 2007. We're building a top.
The market peaked in April, troughed in early June and rallied
all summer with little volatility on hopes of more liquidity from
the governments. We may have one more push up into September and
possibly October, but I think we are more likely to see a
significant correction from the 1440 level on the S&P.
Everyone is anticipating more liquidity to keep coming out of
the central bank. Piling up debt on top of debt: Does that sound
like a good strategy? Would you do that in your own business or
life? Of course not.
Yet, we are delaying action on the underlying problems. We
need to cut spending. We have trillion dollar deficits, systemic
problems with underfunded pensions, health care obligations, high
unemployment, a huge slowdown in China, a pending exit of Greece
from the European Union and a fiscal cliff.
And those are the "knowns." What about the unknowns like the
recent hurricane, which could have been worse? Israel and Iran
heating up. What if Spain exits the EU? All of these things could
cause a market implosion.
Investors should hedge their portfolios with eitherActive Bear
ETF (HDGE) orSPDR Gold Shares (GLD).