ETF Expert

Not surprisingly, I’ve read a fair number of articles about the U.S. market’s 410-point, 3-day slide. Yet I am somewhat surprised by the quickness with which many seem to insist that U.S. stocks have nothing left to offer investors. (Of course, naysayers played the same doom-n-gloom game in June of 2006 and February of 2007.)

Below are reasons why domestic stocks may find it difficult to move ahead. And, for the purpose of impartiality, a "counter" is presented. What’s more, I offer several solutions for investing in a sideways and/or uncertain market.

1. In spite of a slowdown in real estate as well as the overall U.S. economy, the U.S. Fed has no intentions of lowering interest rates in 2007. In fact, some believe the Fed will actually look to raise interest rates to further curb inflation. (Counter: Americans are still working, consumers are still purchasing and companies are still merging. The overall economic slowdown means the Fed has to remain "on hold," leaving companies and their stock prices to perform admirably throughout 2007.)

2. The U.S. markets respond to to the global economy, and central banks worldwide are also raising interest rates. When China warned about raising its rates to cool its economy this past February, the U.S stock market lost 400 points in a single day. When the European Central Bank raised its rates from 3.75% to 4.0% on Wednesday, the U.S. stock market suffered as well. (Counter: Granted, rising interest rates around the world affect the U.S. markets. Yet those rates are relatively modest as well as indicative of a strong global economy… all of which is good for stock assets.)

3. Gas prices are at record highs, and U.S. consumers can take only so much. If consumers are less willing/able to borrow from their homes to spend, and if their take-home pay continues to get pounded at the pump, small-ticket and big-ticket items can’t be purchased. (Counter: Consumers spend when they are comfortably working. Unemployment is lower today than the average for the 70s, 80s or 90s.)

If the perma-gloomers are right (and they will be… someday), investors simply need to use stop-loss orders on their ETF positions for asset protection. If U.S. stocks are simply going to trade in range or flirt with volatility for a period, one might wish to consider assets that do not depend on the direction of U.S. stocks.

Here are a few possibilities:

The iPath Dow Jones-AIG Commodity Index (DJP) This investment reflects the returns that are potentially available through exposure to all commodities. No one commodity can account for more than 33% of the index. There is exposure to oil, naturally. But there’s also exposure to industrial metals, precious metals, livestock and agricultural products. Not only are commodities in demand worldwide, but the index is not dependent on the movement of stock markets.

The iPath S&P 500 Buy/Write Index Fund (BWV). Although a brand new investing vehicle, tracking the CBOE S&P 500 BuyWrite Index is a popular strategy. Like the closed-end ETF cousin, the S&P 500 Covered Call Fund Inc. (BEP), an investor makes money as the fund collects premiums (income) from those purchasing long futures contracts. You always get the income. What’s more, the approach works best in sideways markets, and offers some protection against down markets. The downside risk is the performance that may be lost when the market is barreling forward on a bull market express.

The PowerShares DB G10 Currency Harvest (DBV). This index is made up of long futures positions on three currencies with the highest interest rates and short futures positions on three currencies associated with the lowest interest rates. This has the effect of compiling an excess return from the differences between strong currencies like Australia and weak currencies like Japan. Better yet, it has a historical risk (beta) that is 1/3 of the S&P 500. (What’s more, it has gained 14% since September 2006!)

Disclosure Statement:  As a Registered Investment Advisor, Pacific Park Financial, Inc. may hold positions in the ETFs, mutual funds and/or index funds mentioned above.