After the S&P 500's strong rally of 10% so far this year and 23% from its June low, stock investors must turn defensive and brace for an eventual pullback, say three ETF investing strategists.
We asked them to share their outlooks for the stock market and their best ETF ideas for the second quarter.
Matthew McCall, president of Penn Financial Group in New York with $150 million assets under management.
With the market near all-time highs to end the first quarter, I am looking to keep exposure to equities with some downside protection.Global X SuperDividend ( SDIV ) is an equally weighted basket of 100 of the highest dividend-paying stocks in the world with a 12-month yield of 8.3%.
It offers access to the U.S., Australia, the U.K. and Singapore with heavy sector concentration in real estate investment trusts (REITs), telecommunications and financials.
REITs remain strong as demand for housing, both residential and commercial, continues to increase and inventories fall. A large portion of the telecoms in the ETF are based outside the U.S. and are looking to take advantage of the continued growth of wireless usage in emerging markets. Financials are poised to continue their rebound in the second quarter as the health of the overall banking sector improves after a few years of de-leveraging.
The biggest risk for SDIV is a global market sell-off. The likelihood of this is not too high and will only occur if a macro event occurs such as a European Union country needing a bailout or missiles flying in the Middle East.
SDIV's 8.3% yield combined with great demand for high dividends in a low-yield environment will lighten the blow during any pullback.
Oliver Pursche, president of Gary Goldberg & Co., co-portfolio manager of GMG Defensive Beta in Suffern, N.Y., with $650 million in AUM.
Over the past few years the second quarter has been challenging for investors. With rising turmoil in Europe, the ongoing budget battles in Washington D.C., and after the market gaining over 8% in Q1, I expect a repeat performance.
I expect the current bull run to pause. Of course, there are outside forces at play, most notably the manipulation exerted by policy makers. So selling out and going into cash is unlikely to be wise.
IShares S&P U.S. Preferred Stock Index ( PFF ) invests in preferred stocks primarily issued by large U.S. companies, mainly financials, which I believe should continue to perform well over the next few months.
Nearly 65% of the ETF is invested in diversified financials and banks, with another 18% invested in real estate and insurance. Holdings includeWells Fargo ( WFC ),Black Rock ( BLK ) andCitigroup ( C ). The largest holding, a General Motors (GM) preferred stock, only makes up 2.46% of the portfolio.
More importantly, companies in the ETF have strong, high-quality balance sheets. That's paramount to a more conservative investment approach. In the event of a short-term pull back, PFF's dividend, which currently stands at just under 6%, should help cushion the blow.
If markets continue to rally, some price appreciation along with the dividend could make for a handsome return.
Simon Maierhofer, founder of iSpyETF in San Diego, Calif.
Based on the market's recent modus operandi, the second quarter of 2013 will be a tale of two markets. The first part of the quarter should see rising equity prices, the second part should see falling prices. If you print out a five-year chart of the S&P 500 and draw a vertical line on every May 1, you'll see the following pattern every single year since 2008: The S&P sprints into a May high and takes a breather or collapses thereafter.
The exact day of the high varies, but the S&P declined at least 10% from its May 1st level in 2008, 2010, 2011 and 2012.
It may have to do with the Federal Reserve's quantitative easing programs flow. And it may be just plain old "sell in May and go away" seasonality, but ultimately we don't know and we don't need to know.
The same pattern has happened four out of the last five years. Patterns come and patterns go and past history doesn't mean it will return like Groundhog Day this year. However, most of my indicators are lining up to suggest that 2013 will rhyme with prior years.
At this point, the upside potential seems limited compared to the downside risk. We all know about the follies of investing in an extended market -- both long and short.
Considering that the S&P 500 will run into stiff technical resistance around 1,590, there are two low-risk ways to safely play the "sell in May and go away" pattern:
1) BuyProShares Short S&P 500 (SH) when the S&P 500 is at 1,590 with a stop-loss just above 1,600. The potential risk is 1%. The potential gain is around 10%.
2) Buy SH once the S&P moves above and closes below 1,577.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.