Matthew D. McCall's  Instablog

The 50 percent rally in the S&P 500 over the last five months has garnered the attention of investors and has not left much room in the headlines for other asset classes. Sure commodities get some mention from time to time, but even oil and gold have taken a backseat to equities. One asset class that has been shunned off to the Island of Misfits has been corporate fixed income. Corporate bonds have never been the “sexy” investment, but there are times when it is imperative to have exposure to the asset class - I still believe now is a good time to own bonds of all types.

 

To put the recent moves in perspective, the S&P 500 bottomed in March 2009 and has rallied 50 percent from the low; the Dow Jones Corporate Bond Index has gained 31% from its low in October 2008. There is a clear under performance; however the risk is less for bonds in general. When comparing corporate bonds to treasuries, the spread between the US long bond and an AAA-rated corporate bond was 185 basis points in July, down slightly from May. The spread using the BBB-rated corporate bond, which is still investment-grade, is 353 basis points. The historical average for the AAA-rated is 80 basis points and 178 basis points for the BBB-rated. As you can see the spreads are much higher than normal; but they are also much narrower than they were in the fourth quarter of 2008.

Aeropostale (ARO) - A poor man’s version of Abercrombie & Fitch (ANF), ARO has been able to blow away the competition in the mid-tier teen clothing sector. The company saw sales increase by 20% during the second quarter and as parents try to find their demanding teens “fashionable” clothes, ARO will be the destination due to reasonable prices. Stock is currently hitting an all-time high and can be bought on all pullbacks.

 

Ross Stores (ROST) - The company’s motto is “dress for less” and there will be many parents following the same strategy as they prepare to clothe their children for the upcoming school year. Company has grown sales the last two quarters and earnings per share rose 52% in the second quarter. Similar to ARO, ROST is hitting an all-time high and should be bought on down days only.

The debate across American rolls on as both sides of the aisle attempt to push their version of the health care reform down the throats of taxpayers. There is no doubt in my mind that some type of major changes will occur in the industry in the next year or so, the question what and when? This uncertainty has forced me to underweight the health care sector in our newsletter and for clients. But after doing some more research this past week, I have found four health care stocks that are poised to do well with or with reform sweeping across the industry.

 

As part of the stimulus package, approximately $850 million will be allocated to community hospitals for upgrades to equipment, including IT. President Obama also pledged several times over the last year to put $40 billion in upgrading the nation’s health care IT from paper to electronic. This is a move that is well overdue and can help eliminate costs over the long-term.

As the price of gold has been stuck in a narrow trading range for months and oil is failing to break above the $75 level, investors can turn to unfamiliar commodities that are not considered the usual suspects when looking at investing in the sector.

 

The iPath Dow Jones-UBS Sugar ETN (SSG) hit a new high today as the price of sugar futures hit the highest level in two decades. Investors can use the ETN as a vehicle to play the price of sugar within their portfolio. The ETF is up 64% year-to-date.

Investors have an opportunity to invest in ETFs that not only offer upside potential through capital appreciation, but also above average dividends. Whether you are a young or old investor, the thought of a regular sizable dividend payment is attractive.

Here are three ETFs that I believe will outperform the market along with a high dividend yield.

1. SPDR High Yield Bond ETF (JNK) - Invests in corporate high yield (junk) bonds and pays out a monthly dividend that equates to an annual yield of 13%. Junk bonds and other risky assets remain undervalued and as the economy comes out of the recession pricing will move back to normal. JNK should move higher in value and continue to pay its monthly dividend.

 

The ETF is the Claymore/AlphaShares China Real Estate ETF (TAO), which invests in companies that derive the majority of their income from real estate operations in China. Nearly all the 39 stocks that make up the ETF are traded overseas in China or Hong Kong, the one exception is E-House China Holdings Limited ADR (EJ). TAO began trading in December 2007 and hit a high of $27 before hitting a low of $7 in November 2008. After finding the bottom, the ETF has begun to attract more attention with the average volume quadrupling. The 7.9% GDP increase China reported in the second quarter has only helped the bullish case for the county and its real estate stocks.