Advisors Discuss Safe Investment Strategies

By Murray Coleman

With stock markets falling in the U.S. and commodities booming, some advisors and independent money managers are reevaluating their current lineups of exchange-traded funds.

But market conditions are only one part of the equation. For some, the stream of new ETFs and exchange-traded notes coming out lately has led them to review their options.

"A new commodities ETF or ETN is coming out almost every week," said Anthony Welch, an advisor at Sarasota Capital Strategies. "We're not changing our weightings these days as much as using this time when the market's down to take a closer look at whether we've picked the best funds on the market."

While sticking with commodities, he has sold an oil and gas ETF and switched into the ELEMENTS Rogers International Commodity ETN (AMEX: RJI). The ETF launched late last year and offers different types of exposure to the market than its rivals, Welch says.

"This ETF has commodities that aren't historically in other funds," he said. "For example, it has rubber exposure. Another is barley. Both of these commodities are doing very well under current market conditions."

At 0.75% in expenses, RJI isn't the cheapest commodities ETN. "But it's still reasonably priced in our view. And with exposure across metals, agriculture and energy, it has a unique profile for this type of a fund," Welch said.

With the strong run-up in raw materials prices of late, Sarasota Capital's managers say it's also a good time to make sure that risks in their clients' portfolios are efficiently diversified.

"Typically, commodities bull markets last for many years," Welch said. "So we think this is the third inning of a nine-inning game. But we also think that prices could pull back somewhat in the short term."

Doug Wilde, chief portfolio strategist at UBS Wealth Management in the U.S., says while energy- and commodities-related funds still play a role in the firm's ETF portfolios, his most recent moves have been to boost exposure to dividend-paying stocks.

"Dividend-paying sectors and companies weren't rewarded last year to the extent they had been in prior years. So we think those companies will appreciate more and we're tilting our investments to those companies and sectors," Wilde said.

At the end of 2007, he lightened up on tech and added to telecom. In that sector, he's using the Vanguard Telecom Services ETF (AMEX: VOX). "It's more of a pure-play than something like a comparable SPDRs ETF, which basically combines tech and telecom," Wilde said. "It's also the cheapest on the market."

Telecom firms as a group are paying dividends around 3.5% right now. "That's about a 50% premium over the broader market," Wilde said. "And compared to the 10-year Treasury, which is yielding around 3.6% now, VOX is becoming increasingly attractive."

Gary Gordon, president of Pacific Park Financial Inc., has reentered iShares Dow Jones Select Dividend Index (NYSE: DVY).

It's a name he's quite familiar with after owning the fund for nearly four years before selling it last summer. That was after financials as a whole had started to deteriorate as a result of the subprime loan meltdown.

By the time he unloaded his positions, DVY had dropped 8% from its peak and the fund's yield was just a scant 2.6%.

But DVY's dividends have risen now to the point where the Aliso Viejo, Calif.-based portfolio manager views it more favorably.

"There's evidence that financials are closer to a bottom at this point," Gordon said. "And DVY is yielding 4.75% now, which gives it more of a cushion to offset any further market declines."

He has also recently moved into iShares S&P U.S. Preferred Stock Index (AMEX: PFF). Gordon likes the fact it has a yield of around 7%, which is paid monthly. "Most of PFF is in financials, which really hurt it over the past year," Gordon said. "But if financials can gain momentum, this is another rather low-risk way to play a rebound in financials."

He's not ignoring energy and natural resources, though. Gordon likes to use iShares S&P GSSI Natural Resources (NYSE: IGE) for both. "To me, it has the same companies in the energy indexes. It pretty much moves in similar patterns to XLE [Energy Select Sector SPDR]," Gordon said.

Until their momentum breaks down, there's no reason to believe energy and materials won't keep working, he added. Gordon checks returns over four-, eight- and 12-week periods. He also ranks ETFs by relative strength.

Gordon balances those momentum picks with bargain-oriented ETFs. And he also invests in asset classes not covered by either for diversification purposes. Those include PowerShares Emerging Markets Sovereign Debt (AMEX: PCY) and CurrencyShares Swiss Franc Trust (NYSE: FXF).

But his best performer in the past nine months has been iPath Dow Jones-AIG Commodity Index (NYSE: DJP). So far in 2008, it has gained more than 16%.

"The key to reaching targeted portfolio return levels over time with less risk is diversification," Gordon said. "All of these ETFs and ETNs are less correlated to U.S. stocks and bonds. And they're doing relatively well from a macro view as well."

Comments

[granger:]

Great article. i enjoyed it. I have used several of the instruments disucussed. My biggest move was to put all of my 5% commodity exposure over to the RJI. Previoulsy, i had used 3 different funds. I believe RJI is better.

2008 Mar 07 12:49 PM

[JY_Crockett:]

RJI was a brilliant idea. It is a great way to position yourself in commodities without cleaning out your portfolio and buy gobs of contracts to balance out your exposure as you would in Rogers International Index. I also discount the idea of there being any kind of commodities bubble. This is a world economy now. Asia is booming and there are more people acquiring wealth (or at least money) and are spending it on cars and buildings--both dig deep into the core of Rogers' Index. Any "corrections" will be minor at the very worst and short lived. Moving forward, I see these natural resources soon becoming in short supply and I see no immediate end in the U$D slide (as long as Bernanke is fed chief) so expect commodities to continue their climb. It's really the only game on the planet.

2008 Mar 09 12:23 PM