Sector ETF Ideas for When We Return to Valuation-Based Market

Scores of big-name "value" managers in the mutual fund world are already making their individual stock picks. Marsico, Whitman, Miller – there’s no shortage of iconic players.

What about the world of index investing through ETFs? Are there bargains on broader based indexes that certain ETFs track?

Here are a variety of ETF themes that may get more attention when the economic fires receive enough water and when the subsequent smoke clears:

1. Japan. The only thing strong about the 2nd largest economy in the world is its currency, the almighty yen. Japan is struggling with a rapid decline of exports, nervous consumers on their home-front and horrifically low demand for hallmark brands like Toyota.

That said, an upcoming demographic shift places Japanese consumers smack in the middle of their peak spending years circa 2009-2018. What’s more, the broad TOPIX Index of Japanese stocks recently traded with a P/E of 9 and a price-to-book (P/B) of 1.

Imagine breaking up all 150 companies in a representative Japanese index like the TOPIX, selling off the assets, paying off the liabilities. Wouldn’t that represent a remarkable valuation prospect? Nevertheless, investors have grown so fearful, they are placing zero premium on the long-standing business structures and networks on quality Japanese companies.

When valuations matter once more, investors will choose to revisit the compelling possibilities of investing in Japan. There's the iShares MSCI Japan Fund (EWJ) for large companies; there's the WisdomTree Small Cap Japan Fund (DFJ) for access to smaller corporations that may emerge the quickest from a recession. Purists may even consider the NETS TOPIX Index Fund (TYI), though trading volume is exceptionally light.

2. Telecom. Can you picture a more depressed sub-segment over the last decade than telecom? Domestically, it struggled through one of the worst declines in the 2000-2002 bear, experienced a relatively weak run-up in the 2003-2007 bull market, and then suffered 50% losses off the top in the 2008 malaise.

Yet investors may soon warm up to the possibilities. Consider the fact that domestic telecom collectively has the lowest price-to-book of any economic segment with a P/B of 1.2. So while a disastrous decade may be scary for some, others may view the iShares Dow Jones Telecom Fund (IYZ) as chock-full of opportunity for the next decade.

Personally, I prefer to go global on telecommunications. The iShares Global Telecom Fund (IXP) recently sported a 6% yield that’s difficult to ignore. With a yield that is 2x that of a 30-year treasury and nearly 3x as impressive as a 10-year treasury, who wouldn’t look at the next decade for telecom and think, "In 10 years' time, this should surely be an investment that pays off."

3. Shipping. One final theme appears incredibly risky at first glance. And to be honest, I'm only throwing it out there for consideration.

After all, the Claymore Delta Global Shipping Index Fund (SEA) fell an astonishing 70% from the time it was effectively introduced in September 2008 to the lows of mid-November. Talk about terrible timing!

Yet the introduction of a transportation sub-sector like maritime shipping during the heart of the credit crunch may be a blessing in disguise; that is, today’s investor with an appetite for spice and a bit of cash to look longer-term may recognize how worldwide trade relies enormously on the maritime shipping industry.

Granted, international trade may have come to a screeching halt, but doesn’t it inevitably have to return? And if so, won't the leaders in the seaborne transport of materials and dry bulk goods as well as the operators of tankers and container ships prosper?

The Claymore Delta Global Shipping Index Fund (SEA) tracks 30 leading companies in the narrow sub-sector. To be sure, it’s a volatile one. Yet a recent P/E of 2.5 and P/B of 0.6% makes it hard to disregard entirely. Since its November lows, SEA doubled the gains of the broader markets at large. In other words, the harder things fall…

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

Comments

[Urbane Gori...:]

You are correct about shipping **when the world economy picks up again**. And SEA is probably as good as watching the Baltic Dry Index.

I have heard several people suggest telecom. But for the life of me, aside from price,I can't figure out what the basis for a move in that sector would be... May\be overseas where there is growth. But here in the US? Are there areas without phone service? Is there really that great a potential for cellular? Does everybody really need a Blackberry with 500 Gig of MP3's and 4 dozen video games? Is Palm going to find new customers, or will AAPL, RIMM and PALM just play musical chairs with the available subscriber base? (ARPU... H|eard that on 'Fast Money')

Healthcare makes more sense to me. The population of the US is greying. That means more hip replacements, more h\air transplants, more dental work, more Lasik... If George Carlin were still alive, he'd be investing in that sector...

jegan

Jan 15 12:58 AM