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Three ETF Categories That Are Not Afraid Of The Big Bad Cliff

17 October 2012 at 4:26 pm by Gary Gordon     Bookmark and Share    Follow EtfExpert on Twitter

The second presidential debate served up smoke, mirrors, sound and fury. However, it did very little to advance either candidate’s prospects. In brief, the Kabuki theatrical production was entertaining, but it may not have swayed many voters.

Shockingly, for all the tax rate rhetoric, neither candidate detailed a vision for avoiding a fiscal cliff calamity. If Congress and the White House do not reach a deal by the end of 2012, or at least get the framework of deal that would be signed in January, severe recessionary hardship would be a certainty out of the 2013 gate. Moreover, riskier market-based securities like stocks and commodities could begin selling off in advance of a stalemate if investors smell a repeat of the 2010 debt ceiling negotiations.

The list of expiring tax breaks coupled with automatic spending cuts looms large. At the close of this year, payroll taxes on all employees would rise 2%, alternative minimum taxes will reach deeper into the middle class pocket and Bush era income tax rates would expire. Capital gains taxes would rise; dividend taxes would climb. There are even additional taxes to pay for the new health care law. And let’s not forget, there are deep cuts slated for government programs (primarily defense) — cuts that have ripple effects across the public and private sector.

In a sound-byte society, I wouldn’t expect too many specifics from the candidates on how this country should deal with the deficit, debt and tax revenue simultaneously. A detailed explanation for maintaining/increasing tax revenue while simultaneously paying down the $16 trillion credit card bill may not have been feasible in the town hall setting.

Nevertheless, why on earth wouldn’t the question come up? With whatever amount of respect we owe Ms. Crowley, why wouldn’t she select a question pertaining to the way in which each candidate plans to handle fiscal cliff negotiations? It would seem that few issues have as much impact on jobs, the overall economy and even security for diplomats to Libya than resolving fiscal cliff differences in December/January.

Then again, perhaps I am missing the point. The reason that 80 ETFs from across the risk spectrum are sitting at 52-week highs is because investors wholeheartedly believe that the situation will find resolution. Or, more likely, investors may be comfortable with the way developed world governments kick the can further and further down the road.

In essence, there are three broad categories of exchange-traded funds that are sitting atop lofty perches. As long as a cliffhanger election is followed by a bargain between Dems and Repubs, we might expect continued strength in the very same areas. Ergo, consider buying these members of the 52-week mile high club on the inevitable dips. (And don’t forget your risk management wet suit!)

1. Assets With Historically High Yield Spreads With Comparable Treasury Bonds. Many have warned that increases in dividend taxation and cap gain taxation would result in a massive sell-off in yield producers. That hasn’t happened at all. Instead, with the Fed policy helping to suppress treasury yields, virtually everything with a better income stream continues to remain attractive.

Historically Wide Spreads Still Benefiting High Yielders    
            6 Month %
             
First Trust Dividend Leaders (FDL)     13.9%
iShares DJ Select Dividend (DVY)       8.3%
SPDR High Yield Corporate (JNK)       7.4%
iShares Preferred (PFF)       7.0%
PowerShares Senior Loan (BKLN)     4.9%
             

2. Assets That Have A Strong Measure Of Safety, Yet Still Earn Real Returns After Inflation. For all the developed world debt woe, the emerging sovereigns are in pretty good fiscal shape. For that matter, the overwhelming majority of corporations have repaired, restored and enhanced their balance sheets. Those facts have made winners out of these income producers, especially when treasuries yield negative real returns.

Better Than Developed World Treasury Bonds    
            6 Month %
             
PowerShares Emerging Market Sovereign (PCY)   14.2%
Vanguard Intermediate Corporate (VCIT)     6.6%
Market Vectors Latin America Bond ETF (BONO)   6.3%
WisdomTree Emerging Market Local Debt (ELD)   3.3%
Vanguard Short-Term Corporate (VCSH)     3.0%
             

3. China Has Wiggle Room To Ensure A Relatively Soft Landing. If “Dr. Doom” has his way (Nouriel Roubini), China will crash land its economy in spectacular depression-like fashion. Yet the markets themselves believe that the 2nd largest economy in the world may indeed be stabilizing. The proof is in the emerging market pudding where Asian Neighbor ETFs continue to scale the relative strength ladder.

Asian Neighbor ETFs Surged Over The Prior 3 Months    
            3 Month %
             
iShares MSCI New Zealand (ENZL)     17.5%
iShares MSCI Hong Kong (EWH)       10.3%
iShares MSCI Australia (EWA)       9.7%
iSahres MSCI Pacific Ex Japan (EPP)     9.3%
iShares MSCI Philippines (EPHE)       8.8%
             

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Disclosure Statement: ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc., and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

 

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