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ETFs: Two Defensive Plays Worth Considering

Posted
1/28/2013 1:58:00 PM
By: Teeka Tiwari
Referenced Stocks:URA;VPU

With the stock market all a-twitter and looking like it's 1999 again, I thought it would make sense to take a look at some often overlooked market sectors that have been underperforming, but are positioned to do well long term.

I came up with two sectors that are very interesting, one of which we can consider quite low risk and the other we can categorize as higher risk but potentially very lucrative.

Some folks would tell you to shun all risk but I think that could be a mistake. There are times when you can make a lot of money by trading in sectors that are considered high risk. The key here, when pursuing a potentially higher risk play, is to adjust for that risk by making your position size smaller and to always trade with a stop loss in place.

This is a strategy I followed last year with EUFN, an ETF that tracks the European Banks. At $14, I recommended a stop loss of $13 and, as of yesterday, the stock is trading north of $20!

Just like the European banks that were hated last year, today there is another sector suffering a similar fate.

Everybody Hates This Sector

In the aftermath of the Fukushima disaster, nuclear programs all over the world were shut down and as a result uranium miners and nuclear power industry stocks got hammered lower. This is a very volatile sector and companies in this space can experience wild swings in their price.

The best way to play this is through a diversified vehicle such as an ETF. The ETF to look at in this space is the Global X Uranium ETF (URA).

 

This ETF will give you exposure to some of the biggest players in the Uranium mining space. I'd wait for a pull back to the $6.5 level before getting into this one and I'd use a stop loss point of $5.5 with a price target of $10. Now, remember this is a speculative play. The chart looks horrible and the group is hated!

So the smart play here is to use weakness to buy in and to cut your position size down to about a quarter of what you would normally use. This way, if we're wrong, we don't do permanent damage and, if we're right, you get to boost your returns for the year (plus the bragging rights!).

Electric Boogaloo

Electric utility stocks have been having a tough go recently but it looks a little overdone to me. This is a much more conservative sector than uranium stocks, so normal sized positions look appropriate when weighing opportunities in this sector.

Again, I prefer using ETFs to gain exposure to a sector rather than an individual stock because I love the diversification and flexibility that an ETF offers me. The ETF that you want to consider is called Vanguard Utilities (VPU).

This ETF gives you exposure to a broad swath of top tier electrical utility companies along with a very nice 4% dividend yield. I like the stock right here at $77.91, with a $74 stop and an $85 target.