For many investors, 2011 was an up-and-down year; risky assets came racing out of the gates, but a string of negative developments erased all of the early gains during a chaotic summer. Heading in to 2012, the outlook is mixed; there are plenty of reasons to be optimistic about the future, as well as some considerable hurdles that could make coming months challenging. Against this uncertain backdrop, we outline 12 ETF ideas that seem to be positioned for success in 2012:
1. WisdomTree Emerging Markets Local Debt Fund (NYSEARCA:ELD)
This fund offers exposure to debt from issuers in emerging markets that is denominated in the local currencies, positioning ELD to benefit from any weakness in the U.S. dollar next year and potentially bringing geographic diversification to the fixed income side of greenback-heavy portfolios [see Back To Basics: 7 ETFs For Long-Term Investors].
The appeal of ELD lies in both the dollar diversification it brings as well as the juicy yield; the 30-day SEC yield, a standardized measure of current return, is currently in the neighborhood of 5%. That’s an incredibly attractive opportunity given that ELD features relatively low interest rate risk (the effective duration is less than 4.5) and what we deem to be moderate credit risk. There is always the possibility that the dollar could climb if risk aversion spikes, but the expectation of continued low interest and growth rates domestically make such an appreciation unlikely.
2. EGShares Small Cap India ETF (NYSEARCA:SCIN)
This pick is more of an opportunistic buy of an asset class that has potential to deliver huge returns over the long run. The Indian economy is expected to eventually become the second-largest in the world, posting growth rates over the next several decades that surpass even China. Small cap companies that rely on growth in local consumption should be ideally positioned to profit from a swelling middle class, ongoing urbanization, and general increases in wealth and improvements in quality of life [see Evaluating India ETFs: Three Important Factors To Consider].
SCIN’s struggles in 2011 allow investors to tap into this investment theme at a big discount; this fund has lost more than 40% of its value in 2011 as a result of inflation-related concerns, corruption, and general risk aversion. India is frustrating to many investors: a massive economy with tremendous untapped economic potential that has repeatedly stumbled in its attempt to increase its presence on the global stage. SCIN could definitely have more short-term volatility ahead, but this fund could deliver some impressive returns to those willing and able to hold on for the long haul.
3. PowerShares Dynamic Media Portfolio (NYSEARCA:PBS)
The investment thesis behind this targeted ETF is driven by the dramatic events that unfold every four years: presidential elections. Some changes to the regulatory environment over the last couple of years have virtually guaranteed that campaign spending in 2012 will shatter all previous records. Loosened restrictions on advertising spends will result in various organizations flooding the airwaves with campaigns for their candidates and issues, beginning with what are expected to be hotly-contested primaries and continuing through November (if you live in a state featuring an early primary, you’ve likely already been inundated).
PBS offers a way for investors to own the companies that are going to be cashing the record-breaking checks being written by candidates, political action committees, and other organizations; this ETF consists of companies engaged in various mediums such as radio stations, TV broadcast networks, and newspapers [see PBS Holdings].
4. E-TRACS Alerian MLP Infrastructure ETN (NYSEARCA:MLPI)
This ETN targets Master Limited Partnerships, companies that own oil and gas pipelines in North America. Thanks to some unique tax advantages, MLPs tend to offer very attractive distribution yields; MLPI, for example, has paid out about $1.52 per share, or almost 5% of the per share price, so far in 2011. That yields represents a big step up from just about every stock and a meaningful increase over most fixed income securities as well. This pick is intriguing because it presents an opportunity for big dividend payments without forcing investors to take on excessive risks [see MLP ETFs: Fact And Fiction].
MLPI likely won’t deliver huge eye-popping gains in 2012–or in any year. But this product is very likely to make attractive distributions and feature a generally stable share price in the new year, just as it did in 2011. Because MLPs essentially own the tollways through which energy commodities are transported, their revenues are less sensitive to changes in spot prices than other, more “traditional” energy companies.
5. Market Vectors Agribusiness ETF (NYSEARCA:MOO)
A number of agencies have warned in recent years that food crises will become increasingly common and severe in coming decades as the global population continues to grow. With the populations of emerging markets simultaneously expanding and increasing their standard of living, demand for protein and other “high quality” food staples has been climbing. And these trends of population growth and urbanization are only in the early innings; they are expected to continue for the foreseeable future. That could translate into robust demand for agribusiness products and services; more mouths to feed means a greater need for technologies and capabilities that improve crop yields.
It’s also worth noting that MOO has attracted some massive inflows so far in 2011, perhaps indicating that a big amount of “smart money” is getting behind agribusiness stocks.
6. Global X FTSE Greece 20 ETF (NYSEARCA:GREK)
This ETF pick is purely a contrarian play–and an admittedly risky one at that. GREK offers a way to invest in the Greek stock market, which has seen close to 90% of its value erased over the last few years as the country has been pushed to the brink of fiscal collapse. While the recent past has been catastrophic, there is opportunity to capture some material gains if Europe is able to pull Greece back from the brink. The developments in the ongoing debt saga have actually been quite positive in recent weeks, as private investors have agreed to haircuts on bond holdings and efforts to implement badly-needed cuts to government spending have gained some momentum.
GREK is perhaps the best opportunity to live out the old Buffett mantra of “being greedy when others are fearful.” At a time when most investors won’t touch Greece with a ten foot pole, GREK offers a way to tap into a market that could be bottoming out. GREK is essentially a bet that Greece doesn’t meet complete collapse in the new year, and can certainly be expected to exhibit a fair amount of volatility. For the risk tolerant crowd, we believe this ETF has some opportunity to surprise in 2012.
7. Market Vectors High Yield Municipal Bond ETF (NYSEARCA:HYD)
This ETF was one of our picks for 2011, and delivered such an impressive return that we felt compelled to include it once again for the upcoming year. As the name suggests, HYD focuses on debt securities from municipal issuers that receive below investment grade ratings. Specifically, the underlying index consists of a 75% weight in below investment grade securities and a 25% allocation to Baa / BBB-rated bonds. Many of the securities found in HYD come from arrangements between municipalities and private corporations, which explains why about a quarter of the portfolio is dedicated to tobacco-related issuers.
Given the anxiety over the health of the muni bond market–especially high yield muni bonds with less-than-perfect credit ratings–it shouldn’t be surprising that HYD can make a potentially attractive payout. For investors in the 25% tax bracket, the tax equivalent 30 day SEC yield is in the neighborhood of 7.7%; those in the top 35% bracket can get a return equivalent closer to 8.8%.
8. S&P Global Nuclear Energy Index Fund (NASDAQ:NUCL)
For investors with any exposure to the global nuclear industry, 2011 was a challenging year. NUCL lost almost a quarter of its value last year, the result of an unfortunate series of events that few could have predicted. Nuclear power came under intense scrutiny after a reactor melted down in Japan following a tsunami there, sending authorities scrambling to contain the fallout and renewing fears about a source of power that had built an impressive track record over the last several decades.
In the wake of the Japan crisis, several governments began to reassess their commitment to nuclear power. Some decided to pull the plug entirely, scrapping plans for a nuclear expansion and setting the stage to shutter active nuclear power plants. Not surprisingly, those developments dealt a blow to the companies that make up NUCL.
We like this ETF because the backlash against nuclear power has no choice but to be short-lived. With solar and wind power struggling to gain traction and become economically viable on a large scale, nuclear power is the obvious answer to what is becoming a more serious issue globally. The need to significantly increase nuclear power usage is one of the few issues on which U.S. politicians agreed–at least until it became politically tenuous to do so. The reality is that nuclear power is safe and effective, and the options in a world with a growing population and appetite for fuel are limited. Expect nuclear power to make a big come back in 2012, and for that trend to bring NUCL higher.
9. Guggenheim BulletShares 2012 High Yield Corporate Bond ETF (NYSE:BSJC)
This bond ETF is unlike the vast majority of fixed income products currently on the market; at the end of 2012, it will consist primarily of cash and will be scheduled to make a principal distribution to its shareholders. BSJC is linked ot an index comprised of junk bonds scheduled to mature during 2012, meaning that the principal amounts on the underlying notes will be repaid during the upcoming calendar year. Instead of reinvesting the proceeds in new debt, BSJC will pay it out to shareholders–meaning that this ETF will generally replicate the experience of holding an individual bond while still providing diversification across sectors and individual issuers.
With the underlying bonds very close to maturity, BSJC has little in the way of interest rate risk and should bear relatively low credit risk as well. Yet the yield is still very appealing; BSJC has a 30-day SEC yield in the neighborhood of 5.1%, and a distribution rate (the yield if the most recent distribution stayed constant going forward) of about 3.6%. As such, BSJC represents a unique opportunity to capture some meaningful current return without taking on excessive risk–a very appealing combination for most investors.
10. VelocityShares Inverse VIX ETN (NASDAQ:XIV)
This ETN offers daily inverse exposure to an index comprised of investments in short-term VIX futures contracts–a strategy that has struggled mightily in 2011 thanks to heightened volatility and backwardated markets. Though XIV has lost more than 40% of its value in 2011, there is reason to be optimistic that at least the beginning of 2012 will be more favorable. The VIX, a measure of expected equity market volatility, has declined considerably in recent weeks as optimism over the global economy has returned. And more importantly for XIV, contango in VIX futures markets has also returned; the futures curve now has a steep upward slope, a condition that can give a nice boost to the strategy employed by XIV.
Given that XIV utilizes a futures-based strategy to deliver inverse exposure, this ETN probably isn’t appropriate for risk-averse investors who aren’t willing or able to regularly monitor their positions. But for those who grasp the complexities associated with XIV, the current environment might just be perfect for this ETN. XIV might not be a good ETN to own throughout 2012, but it certainly seems to be positioned nicely for a strong start to the year.
11. iShares MSCI Malaysia Index Fund (NYSEARCA:EWM)
This ETF has been one of the very pleasant surprises of the last two years; after delivering a huge gain in 2010, EWM followed up in 2011 by holding its value quite nicely as most other emerging markets crumbled. In fact, EWM has delivered one of the most impressive returns over the last five years. Malaysia’s economy still has plenty of room to run; inflows from Middle East investors are boosting the financial sector, and Malaysia’s rock bottom employment rate has helped to spur growth in the consumer sector.
This ETF is a bet that the Malaysian economic expansion continues in to the new year, since there is no compelling reason why it would slow down anytime soon. Even after the strong performance of recent years, Malaysian stocks are still quite cheap (EWM has a P/E of about 18x) so the upside potential seems considerable.
12. IQ Canada Small Cap ETF (NYSEARCA:CNDA)
This ETF offers exposure to a corner of the global economy that is often overlooked by U.S. investors despite its proximity: Canada. As one of the most resource rich economies in the world, Canada has developed a degree of stability that is remarkable in the current environment; banks are well capitalized, energy independence is a given, and unemployment is relatively low compared to other developed markets. This ETF gives investors an opportunity to tap into this stability while maintaining significant upside potential if the commodity bull market continues into the new year.
CNDA has a heavy tilt towards materials and energy companies, allowing investors to tap into the compelling natural resource story that has been a driving force behind the Canadian economy [see CNDA Holdings]. After a less-than-stellar 2011, CNDA could be positioned to thrive in the new year if resource prices remain firm–even if growth is elusive for the U.S. and Europe.
Disclosure: Long CNDA, XIV.
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