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Equity markets have taken a wild ride this past year as everything from an unimaginable earthquake in Japan to a looming debt crisis in Europe have taken a toll on investor confidence. As 2011 draws to a close, many are left scratching their heads in confusion and uncertainty, given the predominantly gloomy economic outlook that many are expecting for the New Year. Financial behemoth UBS (UBS) has issued its economic outlook for 2012 along with a set of conservative investment principles that are sure to please the defensive-minded crowd worrisome of continuing economic turmoil.

Within the detailed 28-page report, UBS Wealth Management Research emphasizes the importance of staying diversified on all fronts given the overhanging debt drama on both sides of the Atlantic. Volatility is expected to remain abundant in 2012 as the eurozone struggles to restore stability in its debt burdened member nations, while the political gridlock at home may further intensify as the 2012 presidential election approaches. The firm also anticipates that slow and steady growth in the U.S. and a recession in the eurozone could create significant headwinds for emerging markets. Despite looming risks in developed and emerging markets alike, UBS outlines several investment strategies focusing on specific asset classes that are poised to perform well amidst the ongoing uncertainty. Below we profile several ETFs that coincide well with the main points discussed in the UBS 2012 global outlook report:

High Quality Corporate Bonds

UBS stresses on several occasions the importance of yield-generating securities given the current low interest rate environment. The firm recommends a tilt toward fixed income with a specific focus on high-quality corporate bonds from multinational corporations:

  • iShares iBoxx Investment Grade Corporate Bond Fund (LQD): This is the biggest offering from the Corporate Bonds ETFdb Category; LQD provides investors with exposure to 600 highly liquid, investment grade corporate bonds. Top holdings include big names like AT&T (T), Wal-Mart (WMT), Verizon (VZ) and General Electric (GE).
  • State Street SPDR Barclays Capital Issuer Scored Corporate Bond ETF (CBND): This is a one-of-a-kind corporate bond ETF that goes out of its way to deliver exposure to only the most “financially healthy” issuers. CBND’s underlying index uses three fundamental factors to determine the weight given to each issuer among those in the eligible universe: Return on Assets, Interest Coverage and Current Ratio.

Sovereign Debt

Eurozone drama is expected to continue as policymakers struggle to tame towering debt burdens stemming from financially fragile member nations. UBS hints at avoiding government bonds from highly indebted developed countries, and instead advises investors to opt for emerging market sovereign debt:

  • PowerShares Emerging Markets Sovereign Debt Portfolio (PCY): This ETF tracks an index that is designed to reflect the potential returns of a theoretical portfolio of liquid emerging markets, U.S. dollar-denominated government bonds issued by approximately 22 emerging-market countries.
  • Van Eck Market Vectors Emerging Markets Local Currency Bond ETF (EMLC): This ETF also provides investors with exposure to emerging market government bonds, however, its underlying holdings are denominated in the local currency of the issuer. This allows for dollar-diversification, as the local currencies are well positioned to appreciate in case the U.S. dollar encounters headwinds in the currency markets over the coming year.

Defensive Dividends

For equity investors, UBS recommends U.S. stocks with healthy balance sheets above all else. Dividend investing is the preferred style going forward as historically stable equities will have appeal amidst an otherwise fragile economic landscape. Investors are advised to stick to defensive sectors, including healthcare, telecommunications and consumer staples, while mid cap value equities also appear as an attractive asset class:

  • Vanguard Dividend Appreciation ETF (VIG): This ultra-popular equity ETF is geared toward value investors. VIG is designed to measure the performance of U.S. common stocks that have a history of increasing dividends for at least ten consecutive years.
  • iShares Dow Jones U.S. Telecommunications Index Fund (IYZ): This ETF tracks an index that is comprised of the biggest U.S. telecom stocks, including exposure to both fixed-line communications and wireless communications.
  • State Street Consumer Staples Select Sector SPDR (XLP): This well-known domestic sector ETF makes for a great defensive holding as it includes exposure to companies from the following industries: Food and staples retailing, household products, food products, beverages, tobacco and personal products.
  • Vanguard Mid-Cap Value ETF (VOE): This is the cheapest offering in the Mid Cap Value Equities ETFdb Category and VOE holds a basket of 265 value companies selected from the MSCI U.S. Mid Cap 450 Index.

More For Risk Takers

Although most are advised to follow a conservative portfolio strategy going into 2012, UBS does outline several lucrative investment opportunities for those who can stomach the risk:

  • PowerShares Fundamental High Yield Corporate Bond Portfolio (PHB): The report mentions that high-yield, U.S. dollar-denominated bonds are relatively cheap amongst risky assets since they have already priced in a recession, while equity markets have not. PHB separates itself from traditional “junk bond” ETFs by employing a fundamental approach that assigns weights to individual debt holdings based on four factors: Book value of assets, gross sales, gross dividends and cash flow.
  • UBS DJ-UBS Commodity Index Total Return ETN (DJCI): UBS forecasts that commodity prices may bottom-out sometime in early 2012, bolstered by robust demand from emerging markets. DJCI’s underlying portfolio will appeal to investors looking to achieve balanced commodity exposure; only about a third of the portfolio is allocated to energy commodities, with the other four major commodity families (precious metals, agriculture, industrial metals and livestock) all receiving moderate weightings.
  • iShares MSCI United Kingdom Index Fund (EWU): For risk-tolerant investors, U.K. equities are worth a closer look given their juicy dividend yields and cheap valuations. EWU is predominantly giant and large-cap size equities, giving investors relatively “safer” exposure within an asset class that is otherwise associated with uncertainty given its tangential exposure to the eurozone (see EWU Holdings).

Disclosure: No positions at time of writing.

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Source: How To Invest Like UBS In 2012 Using Only ETFs