8 ETF Picks For 2012
With 2011's wild ride behind us let's look forward to a smoother road ahead in 2012. Even though there are some positive signs for economic recovery, we cannot ignore the possible troubles. The global economy seems to be in a state where the prospects are at best a slow growth. Furthermore, there are multitude of uncertainties including major political elections in China, Russia, France, and the U.S. Add to that some potential black swans, from the possibility of a sovereign insolvency and eurozone split to the resurgence of domestic subprime mortgage debacle. I'm not one for doom and gloom scenarios, just being aware of the realities and possibilities.
As for investment options, first we have to decide on the sectors we want to overweight and then pick our vehicle of choice for investing in those sectors. I believe the sectors that will outperform in 2012 will not be the same ones that led in 2011. Macroeconomic concerns and low interest rates forced investors to gravitate towards defensive sectors such as utilities and consumer staples. As a result, those sectors shined last year, but I would under-weight to equal-weight them for 2012. My assumption is that the trickling signs of improvement in the market will gather a little momentum, in which case my sectors of choice are energy, selective financials, technology, and selective smaller cap dividend plays.
With regards to the vehicle of choice, although we are captive to the market with no control over its gyrations, we do have some control over the kind of ride we are willing to incur. Depending on one's tolerance, we can either brave it, or try to do something about it. In the latter case reducing beta is the clearest choice.
ETFs, CEFs, or Mutual Funds?
One of the best ways to reduce volatility or beta in a portfolio is to diversify among many stocks in different sectors and industries, and the easiest way to accomplish that is through funds. Of the three main forms of funds, I prefer ETFs over closed-end funds (CEFs) and mutual funds.
Once we decide on ETFs, the next question is whether to go with broad funds that cover all or most sectors or selectively pick narrow range funds that concentrate on individual sectors and industries. My preference is specialized sector funds. The reason is they allow for fine tuning of the portfolio through over- or under-weighting particular sectors and industries depending on the economic cycle or special situations.
These ETF picks are by no means defensive or low beta individually, however, I believe collectively they should have a less bumpy performance. So here are the ETFs for the year ahead.
8 ETF Picks For 2012
Data as of week ending 01/06/2012
Market Vectors Coal ETF (NYSEARCA:KOL)
The best time to pick up coal stocks is when they are most unloved, which is around now. The emerging market demand for coal will only be increasing, particularly in China, India, and Africa. Even though the competition from natural gas is growing in the U.S., it is not so in the emerging markets, since coal is cheaper. And unfortunately competition from green energy is not going to be substantial for decades. Additionally, KOL provides global exposure with 53.6% of its assets in foreign companies.
This is a highly volatile sector and this ETF is the best way to play it. The fund is down 31.5% in the past 12 months. Its top three holdings are:
Joy Global, Inc. (NYSE:JOY) 10.6%
China Shenhua Energy Company Limited 9.4%
CONSOL Energy Inc. (NYSE:CNX) 8.7%
iShares Dow Jones US Oil Equipment Index (NYSEARCA:IEZ)
This ties in with the other energy play, KOL. With geopolitical issues constantly flaring up across the world and demand for fossil fuel energy unlikely to decrease in any significant manner anytime soon, this is a sector that will continue to prosper. The fund is down 7.6% in the past 12 months. Its top three holdings are:
Schlumberger (NYSE:SLB) 19.3%
Halliburton (NYSE:HAL) 9.6%
National Oilwell (NYSE:NOV) 8.7%
iShares Dow Jones US Broker-Dealers (NYSEARCA:IAI)
This is another unloved industry in the current market. Firstly, they are in the financial sector and secondly, the credit crisis of 2007-09 has wreaked havoc in the foundation of their business, particularly the investment banking segment. But as financial markets slowly regain their sense of normalcy, the industry will rebound and in some cases with a vengeance. The fund is down 26.8% in the past 12 months. Its top three holdings are:
Goldman Sachs Group, Inc. (NYSE:GS) 7.8%
Morgan Stanley (NYSE:MS) 7.0%
Ameriprise Financial, Inc. (NYSE:AMP) 6.4%
SPDR S&P Regional Banking ETF (NYSEARCA:KRE)
It goes without saying that no sector was hit harder because of the subprime mortgage crisis than the financials, and particularly the banks. Despite the continuing negative sentiment, a large number of banks, especially the regionals and the super regionals have come a long way in cleaning up their risk exposure and balance sheets.
The fund has had a phenomenal run since the October 3rd bottom of $18.57 to January 6th close of $25.53, a 37.5% gain, but still down 2.0% for the past 12 months. The fund’s top three holdings are:
BancorpSouth Inc. (NYSE:BXS) 1.9%
SunTrust Banks Inc. (NYSE:STI) 1.9%
BB&T Corporation (NYSE:BBT) 1.9%
Vanguard REIT Index ETF (NYSEARCA:VNQ)
I continue to like REITs in this low interest rate environment. Even with the run up from the early October lows it is still cheap. If the signs of slow growth in the economy are not reversed, REITs, both residential and commercial, will continue their rebound with a lot more upside remaining. Furthermore, the somewhat lower correlation of REITs with other equities should reduce portfolio volatility. The fund is up 9.1% in the past 12 months. Its top three holdings are:
Simon Property Group, Inc. (NYSE:SPG) 10.3%
Public Storage (NYSE:PSA) 5.2%
Equity Residential (NYSE:EQR) 4.9%
Vanguard Dividend Appreciation ETF (NYSEARCA:VIG)
It's really difficult to put together a better collection of companies than the ones in VIG. In addition to its top three giants, VIG contains Procter & Gamble (NYSE:PG), Chevron (NYSE:CVX), Pepsi (NYSE:PEP),
ConocoPhillips (NYSE:COP), Exxon Mobil (NYSE:XOM), Wal-Mart (NYSE:WMT), United Technologies (NYSE:UTX), and lots more industry-leading companies. The fund is designed to track the performance of the Dividend Achievers Select Index, which consists stocks of companies that have a record of increasing dividends for at lease ten consecutive years.
The fund is up 11.1% in the past 12 months, thanks to a big surge since the October lows. Its current dividend is 2.14%, which has come down due to its price rise. I would not buy it at these levels, but watch for opportunities. Its top three holdings are:
McDonald's Corporation (NYSE:MCD) 5.2%
International Business Machines (NYSE:IBM) 4.8%
Coca-Cola Company (NYSE:KO) 4.8%
iShares FTSE NAREIT Mortgage REITs Index Fund Profile (NYSEARCA:REM)
Do you notice a theme here? Yes, dividends. The one thing we can count on with any degree of certainty is the dividend. I know mREITs are far from being the poster child for dividend stability, but with Federal Reserve promise of low interest rates at least until 2013 and the ‘other shoe’ never dropping, i.e. the commercial real estate mortgage crisis not materializing, these REITs appear attractive.
Note that the vast majority of REM’s holdings are agency mortgages so the risk is largely mitigated. Even if the dividend were to be cut by a third, it would still be over 8% and I’ll be content with that for the next couple of years. The fund is down 18.1% in the past 12 months (or 9.2% if dividends paid are accounted for). Its top 3 holdings are:
Annaly Capital Management, Inc. (NYSE:NLY) 22.63%
American Capital Agency Corp. (NASDAQ:AGNC) 15.49%
Chimera Investment Corporation (NYSE:CIM) 6.45%
Vanguard Emerging Markets ETF (NYSEARCA:VWO)
Even with all the recent negative sentiment surrounding emerging markets, my contrarian sensibility tells me to stay with it. If my assumption of an improving economy comes to pass, albeit at a glacial pace, the developing world will be a big beneficiary. If the European sovereign credit issues persist and Europe slows down and possibly even goes into a recession, this fund will be hit hard. A major part of emerging countries’ economy is their export business. But I’m willing to take that chance since the longer term prospects will remain positive.
The fund is down 20.0% in the past 12 months. Its top 3 holdings are:
China Mobile Limited (NYSE:CHL) 1.9%
America Movil S.A.B. de C.V. (NYSE:AMX) 1.5%
Gazprom (OTCQX:GZPFY) 1.5%
Additional disclosure: I may initiate a long position in one or more of the stocks discussed over the next 72 hours.Disclaimer:Please do not treat this as a buy or sell advice. These are my opinion and ideas, not advice. Please do your own due diligence.