3 Portfolio-Protecting ETFs

If you are not convinced the two-day rally that netted over 500 points on the Dow is the real deal, then you are probably looking for investments that will hold up well if the market continues its downtrend. There are three ETFs that are at or near their yearly highs even though the Dow remains over 6% from its record close in October.

First on the list is the PowerShares DB Agriculture ETF (DBA), which invests equally in four commodities: corn, soybeans, sugar, and wheat. Corn is basically flat on the year after a big rally in 2006. I expect more upside for corn as ethanol becomes more widespread. Soybeans have been on a tear all year and are up nearly 100% in the last 12 months. As more land went to corn, less was available for soybeans, resulting in less supply and higher prices. Sugar has lost about half its value over the last 2 years; however the good news is that it has begun to build a base this year.

Wheat shot up to a record high in September before coming back to earth the last two months. Technically and fundamentally the futures remain bullish. Overall, DBA offers exposure to an area that has shown it can continue to grow with our without the equity markets.

The second ETF is more of a direct hedge against the market falling more. The Rydex CurrencyShares Japanese Yen Trust ETF (FXY) has shown reverse correlation to the US stock market. For the month of November (through 11/26) FXY has gained 7.5% as the S&P 500 fell 9.2%. This reverse correlation can be attributed to the unwinding of the Yen Carry Trade. A market rally will likely result in FXY falling and therefore is considered a hedge investment.

The last ETF is the WisdomTree International Utilities ETF (DBU). A gain of over 4% in November has helped DBU to a new all-time high as the US market struggles with a 10% correction. The reason DBU has been able to shrug off the global market weakness has to do with several factors: utilities are viewed as "safe havens", ability to take advantage of the weak US Dollar, and exposure to the global infrastructure build. Even though many of the European utilities do not pay the hefty dividends of their US cousins, they are considered a place to park some money in a choppy market when interest rates are falling.

The fact they generate the majority of their revenue in local foreign currency and the conversion to US dollars help improve the bottom line. Then there is the play on infrastructure. Many of the top ten holdings are involved in supplying power as well as building new plants in Europe and the emerging markets. After looking further into DBU it is clear why it has been able to outperform the market and continue hitting new highs.

Disclosure: My firm owns shares of DBU

Comments

[Georealist]

Compact protection portfolio..the recent market bounce has also knocked QUID down to attractive levels...when the semi-euphoria of the pending rate cut wears off, like all drugs do, QUID/SRS/FXY could look like a very solid little shield.

[granger]

Thank you, great info.