ETF Expert

At the beginning of 2010, I provided specific guidance for market-beating results. And while declaring a calendar year victory is premature… re-examining the reasons that I selected the ETFs is not.

In January’s “An ETF Portfolio For Beating the S&P 500,” I outlined 3 critical themes that I believed would drive investor behavior. They included the ongoing embrace of Fed-driven reflation, a reasonable need to hedge against inflation and a correction-inspired appreciation of income.

These are hardly the only investing themes that I’ve put forward over the last 11 months. Yet they were the themes that I chose for a buy-n-hold portfolio for market-beating performance back on January 1. (Note: While I am not a buy-n-holder by any tug of the imagination, the purpose of writing the “beat-the-S&P” feature was to demonstrate the process of turning reasoned beliefs into sensible selections.)

The first step in developing investable ideas is to take pages from the history books. For instance, December 31, 2009 had already marked nearly 10 months of stock gains without a meaningful 10%+ correction. That meant the probability of a 10%-20% pullback in 2010 was astronomically high.

Here’s another example. By the end of 2009, it was clear that Federal Reserve’s quantitative easing (QE) had succeeded in reflating asset values in dollars. Economic consequences notwithstanding,  Bernanke and Co. decisions a la ”Don’t fight the Fed” now had an even greater likelihood of influence.

The second step in identifying investable ideas is to decide how the history pages relate to human behavior. In other words, if you’re fairly certain that a faith-shattering correction will occur, you might surmise that investors are only going to hold onto their best income producers and/or shift money into yield generators. And if you’re reasonably confident that the Fed will continue reflating assets by all means necessary, you might surmise that investors will express intrigue with assets that perform well in a weak dollar environ and/or an exceptionally low interest rate environ.

The last step is the actual picking. (And if all goes well… eventual grinning.) In “beat-the-S&P 500,” I explained that some of the best income might come from recession-resistant Global Telecom (IXP) and less-rate-sensitive SPDR Barclays Convertibles (CWB). Moreover, I offered JP Morgan Alerian MLP (AMJ) and GreenHaven Continuous Commodity (GCC) as likely beneficiaries of Fed reflation.

Here’s the ”year-to-date” on my 7-ETF Portfolio for beating the S&P 500:

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