ETF Expert

The media have spent a great deal of effort discussing bad news about the economy. And yet, a recurring "good news" item continues to get a fair amount of play.

Specifically, pundits are all over the networks, web logs and radio programs… trying to call "the bottom." I myself have discussed the possibility that we have seen the stock market’s lowest ebb. Even if we revisit that low point, we are not likely to go much lower. (See the post… "The Backside of the Bear.")

However, my investment philosophy guards against the times when I will be wrong. I don’t fall in love with my ideas or investments; rather, I use stop-losses to manage against extreme downside risk.

Regardless of an actual bottom for stocks, one thing’s clear: The U.S. economy will recover. Knowing that this is the case, does it make sense to focus endlessly on precise lows? Or is it more critical to think in terms of 3-5 years down the investing super-highway?

Smarter, more balanced investors are thinking further out on the horizon. They want to know the vehicles that… if bought today… are likely to be much higher in 2012.

Therefore, I thought I’d give my perspective on areas of exceptional value. I’m calling it, "The Hit List for the Economic Recovery."

1. Financials. Nothing has been beaten to smithereens like financial stocks. The collapse in confidence has squashed everything from insurers to banks to real estate investment trusts to brokerage houses. The question is, which area of financials is a bargain and which area is more of a trap?

Warren Buffett seems to think the bond insurance business is a great place to be. Long-term care providers are gaining ground with each passing day for baby boomers. And insurance itself is the 2nd oldest business in the world. It seems sensible to consider the Dow Jones Insurance Index Fund (IAK).

Real estate prices may have a ways to go before hitting the ocean floor. But that doesn’t mean that income investors shouldn’t get ready for "trusts." Morningstar believes than the Vanguard REIT Index (VNQ) is trading at a sharp discount to fair value. More importantly, the real estate investment trusts in VNQ are collectively offering a yield of 5.3%.

Myself? I continue to favor the Financial Preferred Index (PGF) as well as the Dow Jones Dividend Index (DVY). Preferred shares in PGF are similar to bonds, and they have less risk than common stock. Meanwhile, a 7% yield is relatively desirable alongside the likelihood of appreciation. Similarly, the 4.25% yield for DVY comes with the probability that the 100 highest paying dividend stocks in the U.S. will collectively be higher in 3-5 years than they are today.

2. Technology. The harshness of the tech bubble bursting in 2000-2002 pushes many would-be investors to the sidelines. No way does anyone want to get "dot-conned" again.

It’s different this time around. (Famous last words, I know.) It’s different because technology did not experience a 2007-2008 bubble-burst… housing did. And the declines in big-cap tech names from Cisco to Microsoft to Google come primarily from the fears associated with the recession.

Yet mega-tech companies are trading at 14-18 times earnings… near historical lows for the segment. How will the tech companies profit while the U.S. deals with a recession? Large-cap tech companies earn the majority of profits from overseas, and have outstanding growth prospects because of the weak dollar.

I’m looking for the iShares Dow Jones Tech Index (IYW) to make a remarkable run off the 2008 lows. I also favor the S&P Global Technology Fund (IXN). (Read more about a tech turnaround here.)

3. Transportation. In 2007, the Association of American Railroads registered record volume and revenue for the shipment of chemical, coal, agriculture and other commodities. Warren Buffett has staked his reputation on the viability of Burlington Northern Santa Fe (BNI) by significantly increasing his ownership of the 2nd largest "rail-co" in the U.S.

Can things be as bad as some surmise when a country is transporting goods in record numbers? Owning quality names of transportation companies today positions a balanced investor for an economic recovery. And the best way to invest in the transports is through the exchange-traded fund that for the Dow Jones Jones Transportation Average, the iShares Transportation Fund (IYT).

Granted, I don’t have the warm fuzzy feeling for airline stocks, even though the demand for air travel continues to remain strong. Yet I do believe air freight carriers like FedEx and UPS should awaken like sleeping giants. Why? Just like the tech sector, you’re going to get exceptional growth from overseas.

Of course, some seem to think the price of oil is going to kill trucking. But it’s better to be ahead of the curve when transportation stocks are far below their highs than staying sour on the group as a whole. Air, land, sea — when an economy is in recovery, it’s moving stuff! (Read more about the Dow Jones Transportation Index as a barometer for the U.S. stock market right here.)

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.