3 ETFs to Consider for a Market Correction

When I attempt to play golf, I work hard to keep the ball in the fairway. I don't try to kill it. I rarely attempt to hit a "cutesy," clever shot. And I'm not interested in winning any bets.

Nevertheless, there are plenty of times when I still manage to hit the white dot of a ball out-of-bounds or, "OB." In fact, it's easily the most discouraging part of a day on the links.

Interestingly enough, the financial world has a term for when investments have gone "OB." More specifically, when an investment trades above a normal statistical range (i.e., 1 standard deviation above the 50-day moving average), the investment may be described as "overbought."

Thanks to the solid team over at Bespoke's Think Big site, a reader can see that 9 out of the 10 key U.S. economic sectors are currently out-of-bounds. The lone holdout is SPDR Select Energy (XLE) which is currently "in neutral."

Few investors, even the most bullish, should find "overbought" information encouraging for the short-term. It often indicates a greater likelihood of a correction. Indeed, I recently used a different set of criteria to determine that emerging market ETFs may be even more over-subscribed and subject to a near-term pullback.

Yet unlike the eternal pessimism that appears in so many Seeking Alpha articles, a pullback, even a severe correction that takes investors back into "oversold" territory, may wind up being a unique opportunity. Institutional adviser money that's been sitting in money markets is likely to find a home, as there's pressure to outperform non-existent yields as well as keep up with equities.

In other words, it may be difficult to resist the temptation to get on the momentum train. Yet, by the same token, you don't want to be caught like a deer in the headlights, if and when the markets get banged up. Would you really pass up on S&P 825 in the fear that the March 09 lows were yet another mirage? Or would you take a 7-iron out for a swing? (You can always use a stop-loss!)

3 ETFs that might be worth investigating if a market pullback materializes include:

(1) SPDR Oil and Gas Exploration and Production (XOP). Like everything else in the investment universe, this one will depend on China's thirst for natural resources as well as a relatively weak dollar propping up the price of crude. As long as oil and gas are worth going after, XOP would be a reasonable candidate for an open seat at your portfolio's table.

(2) First Trust Amex Biotechnology Index Fund (FBT). The great irony of biotech is that it's an enormous growth industry with remarkable profit potential, albeit unpredictable. Yet few stock investments handled the recession or the credit crisis better. (See "3 ETFs That Beat the Global Credit Crisis.") More importantly, however, FBT is a true portfolio diversifier as it has one of the lowest correlations with the S&P 500 of any stock ETF.

(3) iShares GS Networking (IGN). CEO Chambers may not be able to give certain guidance about his industry or his company, Cisco (CSCO). Yet if you listen carefully, the straight-shooter still seemed reasonably optimistic that he'd be able to look back and say… "Yep, that was the worst of it." If tech's going to take a near-term beating on uncertainty like this, investors may want to swoop in. Tech/internet infrastructure is one place where Americans can still say… "Yeah, we make that." Plus, there's plenty of revenue generated from overseas operations. (See "How Good Should We Feel About the Tech Sector Recovery?")

Full Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.

Comments

[Seaferer20:]

Gary,
I can't quite agree with your suggestion that IGN is an ETF to consider for a market correction. It closed Friday (8/7) at $24.89, its 50-day MA is $23.85 and its 200-day MA is $19.24, $5.65 or, even more importantly, a whopping 29% below its current NAV. A market correction could lead to a relatively large loss for this ETF. Its alpha is a slight 10, low for a technology fund, but I'd wait for the correction to happen before pushing cash to work.

Aug 09 04:55 PM