5 ETF Investments For Second Quarter From The Pros
What will drive the stock market in the second quarter, and what investing opportunities are there in the stock market today ?
1. Mark DiOrio, chief strategist and portfolio manager at Parasol Investment Management in Westmont, Ill., with $140 million in assets under management.
Although stocks are likely to be the darling of 2013, the second quarter may offer investors a unique opportunity in long-term U.S. Treasuries. Before stock investors stop reading, consider that despite the relentless stock rally, iShares 20+Year Treasury Bond ( TLT ) has actually outperformed the S&P 500 since mid-March.
One of the risk factors for bonds is the potential that weak demand and excess supply would push interest rates higher, sending prices lower. But the supply and demand data shows just the opposite. In fact, in the second quarter, Treasury issuance of bonds will be the lowest since 2008.
What is unique about the second quarter of 2013 is that the U.S. Treasury is scheduled to issue $103 billion in Treasuries, while under the Federal Reserve's quantitative easing program, the Fed is scheduled to purchase $135 billion in Treasuries.
Bond mutual funds are a major source of demand for bonds overall. There's widespread belief of a great rotation out of bonds and into stocks, but the data simply refutes that. During the week ended March 20, 2013, the Investment Company Institute estimated that $4.998 billion went into equity funds, while $5.952 went into bond funds.
Foreign investors are another major source of demand. Despite all the worries that China might sell U.S. Treasuries, during the month of January alone, China added $44 billion in Treasuries. The events unfolding in Cyprus and Europe are likely to only further enhance the safety and appeal of U.S. Treasuries to both private and public foreign investors.
With low rates and QE, rising inflation would send rates higher, depressing prices. It is true that inflation is a longer-term risk for bonds, but the data do not support much short-term risk of accelerating inflation.
Both the CPI (consumer price index) and core CPI reading are holding steady near 2%, revealing little underlying pressures. With the CPI somewhat tame, real interest rates (nominal rate minus inflation rate) for Treasury bonds are sporting their highest levels in two years.
2. Clayton Cohn, president and CEO at Marketaction.com in Chicago.
Q1 of 2013 has seen a run-up of epic proportions. The Nasdaq and S&P continue to reach multiyear highs as each index continues its five-month win streak. The Dow Jones is setting all-time highs as it closes out its fourth month in the black. The S&P 500 is up nearly 10% for the quarter and has seen only two down weeks in Q1 out of 12.
After last year's Q1 spike, the market underwent a harsh correction in the quarter that followed, and we are forecasting the same dreary drawdown for this summer too.
We believe that the world's equity markets are nearing a precipice, and that the best place to be ahead of Q2 2013 is in long-term bonds -- one of them beingVanguard Long-Term Bond Index ETF ( BLV ).
1. Growth in equities seems unsustainable as historical data suggests a 10% to 15% correction in the coming quarter; furthermore, many variables have the power to kill a rally, but very few have the power to sustain it.
2. This run-up has been, for the most part, uninterrupted (until Cyprus). No short-term fiscal or monetary worries and no eurozone crisis headlines have allowed this rally to truck ahead unimpeded. But with European Union jitters back on the table, and equities beginning to stall, investors are going to start seeking a flight to safety in bonds.
3. BLV provides investors with broad investment-grade exposure across nonsecuritized government, government agency and corporate bonds, which make this particular bond ETF ideal when considering the global market uncertainty.
BLV has over 99% of its assets invested in income-producing securities, making it susceptible to systematic risk in the bond market; furthermore, the vast majority of these bonds are long term in duration, making them particularly sensitive to changes in interest rates.
Additionally, despite the ETF's average bond rating of A, the portfolio consists of a considerable amount of BBB-rated bonds (roughly 25%), which increases its credit-risk exposure.
3. Matthew Forester, the chief investment officer at CFG Asset Management Newtown Square, Pa., with $244.6 million in assets under management.
As U.S. equity markets approach all-time highs, some risk-averse investors are wondering if they should book some profits in equities. What do they do with the cash when bond yields are also still extremely low? Investors are worried about stocks and bonds. Where can they go?
We recommend bond ladder ETFs from iShares and Guggenheim, which control for interest-rate risk by only investing in a limited slice of bonds that meet the index requirements within a specified maturity window.
For example, Guggenheim BulletShares 2018Corporate Bond ( BSCI ) invests in 173 U.S. corporate Bonds that mature in 2018. BSCI's expense ratio is 0.24% of assets (24 basis points). The fund itself is set to expire on 12/31/2018.
For munis, the iShares ladder series offers a substantially similar structure. For example, the iShares 2017AMT-Free Muni Bond ( MUAF ) invests in a portfolio of 353 municipal bonds that mature in 2017. This is a national muni fund. It can hold municipals from multiple states and tax-exempt entities.
We don't expect interest rates to rise abruptly. If we're wrong, however, we can hold these funds to maturity like a regular bond. The funds let us target our most desired exposure on the yield curve while holding a diversified portfolio of bonds that meet the index criteria. We get a diversified portfolio at relatively low cost positioned where we think there is value.
We believe these Bond Ladder ETFs will continue to gain market share as investors look for safer fixed-income alternatives that also offer yields above very low duration assets. Meanwhile, they protect you from increases in interest rates if you are prepared to hold the funds to maturity.
We should mention that the closing mechanism for the 2012 series of funds from both companies was completed last year without any hiccups. We should also note that we are among the largest holders in the country of several of the ETFs in these series.
Moreover, we expect major ETF firms to continue to launch additional funds in these series. We're actively encouraging them to do so.
4. Bob Williams, managing director at Delta Trust Investments in Little Rock, Ark.
I like the PowerShares S&P 500BuyWrite Portfolio ( PBP ). Many consider the world's financial markets to be overbought and while I am not yet ready to subscribe to those theories, I do feel that we may likely enter into a prolonged period of sideways movement.
Given the uncertainties of the global economy and world banking systems, I want to keep my funds deployed in domestic large-cap equities with a means of writing covered calls against the position to increase the income. I believe that the financial markets, and particularly the U.S large-cap stocks, will continue to benefit from the transition from traditional defined benefit pension plans into defined contribution plans such as 401(k)s and individual retirement accounts.
Based upon my experience, individual investors typically determine their investment allocation on an annual basis and rarely change those allocations. Many may go a decade or more without reallocating their holdings or new contributions. Thus I believe these monies will continue to provide regular and steady inflows to the markets.
This is a major transformation from the days when the major money management firms routinely moved massive chunks of pension monies into or out of the market as they implemented their market timing models.
Today's mutual fund managers get a large portion of their compensation based upon their performance relative to their benchmark and many literally cannot afford to miss a leg up in the markets.
Among others, this vehicle would expose investors to standard risks associated with covered call writing as well as industry concentration and federal income-tax risks.
Given this scenario and my expectation for a period of market consolidation, I believe this strategy is driven by simple logic and provides an investor who is predisposed to buy equities an inexpensive, diversified opportunity to purchase the large-cap market and sell calls against it.
5. Przemyslaw Radomski, founder and chief investment strategist at Sunshine Profits -- Tools for Effective Gold & Silver Investments in New York.
One of the best investing ideas in the ETF realm is Direxion Daily Gold Miners Bull 3XShares (NUGT), which provides triple leveraged exposure to gold miners stocks.
Gold stocks are one of the most hated sectors at the moment and this is a contrarian play. Gold prices -- the main contributor to gold miners' earnings -- has been consolidating for about 20 months now even though the fundamental picture has become increasingly bullish because of quantitative easing programs. QE is virtually guaranteed to cause substantial inflation sooner or later, which is very bullish for gold prices.
Numerous technical indicators suggest that the ongoing consolidation in gold and gold stocks have caused the situation to now be as or more extreme than at the 2008 bottom. Back then, gold stocks moved up with a vengeance, gaining 100% in less than two months.
Gold's performance was indeed particularly weak in the first quarter. I believe we are now in the final part of a major consolidation (or already behind it), which is natural after a 12-year rally.
The 2008 plunge was rather unnatural. To a large extent, it was caused by hedge funds having to sell whatever they had to raise cash. Gold became too popular in 2011, and we needed to see a big decline. The market needed to catch its breath by shaking out speculators. Since the preceding move up was significant, the correction would also have to be significant -- like the one in mid-70s, when gold declined to $105.50 after topping at $198.
If we didn't have the QE programs in place and the fundamental situation wasn't so great for gold, we would see a much greater decline than what we saw in the past 20 months.
Gold could continue to consolidate or move lower, but it's not likely because the fundamental situation has improved since 2011 and traders are already extremely discouraged.
In addition, its technical indicators are heavily oversold or flashing long-term buy signals. Another interesting signal is that if you examine how often people look for "gold investment" in search engines, you'll see that we are now at major lows -- the same level of interest that we saw in August 2010 (when gold traded at about $1,200 an ounce).
Follow Trang Ho on Twitter @TrangHoETFs