On Thursday, 6/28/2012, Germany’s Angela Merkel seemed to be singing Tom Petty’s iconic tune, “I Won’t Back Down.” By Friday 6/29/2012, many would say that Europe’s most visible leader blinked.
In brief, heads of the 17 euro sovereignties agreed to drop requirements related to aiding Spain’s hapless banks. What’s more, there appears to be agreement with respect to recapitalizing European banks directly with bailout dollars from joint funds.
Naturally, the markets crave virtually any upside surprise from eurozone summits. Of course, a band-aid may stop skin from bleeding, but it cannot cure an infection. Expect more flare-ups out of the region in the months ahead.
What we should embrace, however, is the ability for a wide variety of ETF categories to hit new 52-week highs. Meanwhile, the broader S&P 500 SPDR Trust (SPY) as well as Vanguard All-World ex U.S. (VEU) are still in correction mode.
1. Non-Cyclical Stock ETFs. There are three big segments of the U.S. economy that are not sensitive to GDP acceleration or deceleration. They include utilities, healthcare and consumer staples. Not surprisingly, then, the prominent stock ETFs for those sectors have hit new 1-year peaks, including Vanguard Utilities (VPU), SPDR Select Consumer Staples (XLP) and SPDR Select Health Care (XLV). And that’s in spite of the recent Supreme Court ruling on the Affordable Health Care Act.
2. High Yield Corporate Bond ETFs. I feel like a broken record on this point. Yet the fact of the matter is, I’ve been touting the attractiveness of the yield spread between diversified high yield corporates and comparable treasuries all year long. Powershares Fundamental High Yield Corporate (PHB), iShares High Yield Corporate (HYG) as well as SPDR Barclay High Yield Bond (JNK) have all registered new 52-week highs. Bullishness for this asset class is indeed justified.
3. Preferred Stock ETFs. Nearly three-fourths of the holdings in preferred stock ETFs are financial companies. It follows that - in previous years - concerns about the well-being of the financial sector tended to drag on the hybrid investment. However, yield seekers now appear comfortable with the risk-reward scenario. Powershares Preferred (PGX), iShares Preferred Stock Fund (PFF) as well as the 100% financial company weighted PowerShares Financial Preferred (PGF) all reached new pinnacles.
4. Emerging Market Bond ETFs. Safety is in the eye of the ETF holder. You can try to pursue a modicum of additional capital appreciation out of a 10-year treasury that yields 1.6%. Or you can pursue a 5.2% annualized yield from diversified emerging market bonds ... where the debt-to-GDP ratio is much lower than the United States. Investors have been snapping up PowerShares Emerging Market Sovereign (PCY), iShares JP Morgan Emerging Market Bond (EMB) and iShares Emerging Market Corporate (CEMB), all of which are at the top end of their 1-year range.
5. Dividend ETFs. With the exception of the non-cyclicals that are primarily geared toward safer price appreciation, four out of the five categories share a similar feature - that is, they each have historically attractive yield spreads with comparable U.S. treasury bonds. Throughout the May-June stock swoon, funds like iShares High Dividend Equity (HDV), First Trust Morningstar Dividend Leaders (FDL) and the dividend-weighted WisdomTree Equity Income Fund (DHS) have been notching new highs. (Note: And each has at least 2x the annual yield of the 10-year treasury.)
I would never suggest that any investor “buy-n-hold-n-forget” when owning one or more of the above-mentioned assets. You need to have a plan for when and how to sell. Nevertheless, if you’re looking for asset classes that have consistently held up in a topsy-turvy 2012, these five categories have been beneficial to my clients.
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.