5 ETFs to Buy With Loonie's New Power

|
Includes: CUD, HYG, IHF, JNK, PJP, XHB
by: Larry MacDonald

It’s A Bird, It’s A Plane, It’s Superman! No wait…. it’s the loonie, a.k.a. the Canadian dollar. It’s closing in on parity with the U.S. dollar and by the looks of it, might blow past this psychologically important milestone before you finish reading this post.

Time to wake up Canadian investors and do some foreign diversification. Shake off the cobwebs of inertia and go shopping for U.S. assets with your much enhanced purchasing power!

But the $64,000 question is (in U.S. dollars, of course): which U.S. assets to buy?

Stocks are a bit scary at the moment because they have run up so far so fast. Halloween might be more trick than treat this year murmur the goblins — one being Gluskin Sheff strategist David Rosenberg. He has the DNA of a bear but we still might want to take note of his point that stocks typically haven’t gone up by this much until the second or third year of the business upturn.

Still, there may be some pockets of undervaluation in the U.S. stock market. It might take awhile, but I can see the SPDR S&P Homebuilders ETF (NYSEARCA:XHB) being much higher. The U.S. housing market was ground zero and still looks like it. There remains a big wall of worry to scale and a lot more recovering to do.

U.S. stocks in health care, technology, consumer products and other areas underrepresented on the Toronto Stock Exchange, can add diversification to a portfolio of Canadian stocks. A recent John Heinzl article mentioned some picks in this regard. We could add some ETFs such as the PowerShares Dynamic Pharmaceuticals (NYSE:PJP) and iShares Dow Jones U.S. Healthcare Providers (NYSEARCA:IHF) funds. They are in health sectors that should emerge as winners once the overhaul of the U.S. healthcare system is complete, according to Reuters.

Bonds might not be such a steal anymore either but with stocks having run up so much and now likely exceeding chosen allocations in portfolios everywhere, it might be more prudent to go with bonds at this stage. Indeed, the year-end rebalancing is coming up for many investors and allocating toward bonds will be the path they have to go if they are to stay disciplined. And, of course, if you are near retirement or have trips/sojourns planned in the U.S., fixed-interest investments are the way to go.

High-yield bond ETFs are still offering yields in the vicinity of 10%. Examples are SPDR Barclays Capital High Yield Bond (NYSEARCA:JNK) and iBoxx $ High Yield Corporate Bond Fund (NYSEARCA:HYG). High-yield bond ETFs are not available in Canada, so they would be a welcome addition for investors reaching for more yield in their fixed-income allocations.

Many other, more conservative, bond ETFs are available. The ones tracking short-term bonds, such as the Vanguard Short-Term Bond ETF (BVS), are less exposed to capital loss and their interest rates will move up more quickly if market rates rise. A U.S.-dollar savings account has no price fluctuations to worry about; rates are low (ING Direct pays 0.75%) but should move up as the economy recovers.

Some other ideas for buying U.S. assets that I have posted on before:

- Probably the cheapest of U.S. assets to buy right now is real property — unlike other assets, prices still haven’t gone up much (although the work involved in carrying out a transaction is onerous)

- Another idea is to buy Canadian assets in line to benefit from the soaring loonie, such as shares in Canada’s largest travel-tour operator, Transat A.T. The high loonie means it’s more affordable for Canadians to visit and/or stay in the U.S., which plays to Transat core business of arranging foreign travel and accommodations.

A final note: the loonie could even go past the peak of $1.10 (U.S.) attained in 2007, say some forecasters. Spacing of asset purchases over time would average out the timing risk.