ETFs For An Upcoming Economic Soft Patch [Podcast]

Includes: ECON, FDL, HILO, VYM
by: Gary Gordon

I realize that I may be jumping the March unemployment report gun, but job market conditions in the U.S. may soon hit an economic soft patch. Consider the following:

1. Real Estate Prices Continue To Fall. Even if we are very close to the proverbial bottom, this sobering fact prevents underwater homeowners from selling and relocating to job-rich North Dakota or Texas. In essence, if potential workers can’t move to pursue a new job, unemployment is unlikely to decline significantly.

2. Economic Growth Pattern Is Mimicking 2011. First quarter GDP is unlikely to be any better than Q1 GDP from 1-year earlier. It also will come in at a slower pace than the 3% clip of Q4. What’s more, seasonal factors, as well as the exceptionally mild winter, have had a lot to do with hiring. It follows that it may be near impossible to show acceleration in job creation, leading to disappointment as investors head into Q2.

3. This May Be An Apple-Only Economy. According to Matt Nesto at Yahoo Finance, Factset data shows that first quarter profits would decline 1.6% were it not for Apple product consumption.

Ironically enough, an economic soft patch may not wreak havoc on stocks at all. As long as GDP and job growth remain modest/”so-so”, the Fed would likely continue to purchase 7-10 year maturities to bolster business borrowing/spending and consumer borrowing/spending. That doesn’t even take into account the reality that the spread between 10-year treasuries and earnings yields (E/P) could still be 500 basis points.

Bears can spin the picnic basket in their direction, of course. It’s not like Spanish bond yields are going to decline to a point where the European contagion fears disappear. Nor will Middle East tensions and oil prices dissipate because we want the issues to go away.

Nevertheless, I don’t intend to fight the Fed, the ECB (European Central Bank), the BOJ (Bank of Japan) and the PBOC (People’s Bank of China.) There’s simply too much willingness to accommodate.

It follows that there are a variety of ETFs worth buying on pullbacks:

For instance, I like First Trust Dividend Leaders (NYSEARCA:FDL) and Vanguard High Dividend Yield (NYSEARCA:VYM). Reliable dividend payers may not have been as hot as the Apple-infused S&P 500 in Q1. Yet many of them are still “rocking” new 52-week highs, including Abbott Labs (NYSE:ABT), Phillip Morris (NYSE:PM) and Cintas (NASDAQ:CTAS). I expect funds like FDL and VYM to fare better than the broader market in the springtime, where a soft economic environ seems very plausible.

I also like EG Shares Low Volatility Emerging Market Dividend (NYSEARCA:HILO) as well as the EG Shares Emerging Market Consumer Fund (NYSEARCA:ECON). HILO tracks an index with a yield north of 6% by relying on less volatile, infrastructure-oriented segments like telecom, industrials and utilities. Meanwhile, ECON should benefit from the reality that middle class consumption in the emerging world is based on actual wealth, not debt-fueled binge spending.

Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.