January 20, 2013 – ETF Expert Radio Podcast | Main | How ETF Investors May Profit From Currency Devaluation

Overbought and Overvalued Market? Consider One Or More Unconventional ETFs

23 January 2013 at 10:45 am by Gary Gordon     Bookmark and Share    Follow EtfExpert on Twitter

What are the alternatives for an investor when a large majority of assets are fundamentally overvalued and technically overbought? One can wait to participate, of course. Even if there are no obvious reasons for sellers to enter the marketplace, they always do.

On the other hand, stock fund managers are being flooded with cash that they need to put to work immediately; most have very little wiggle room for keeping cash on hand. What’s more, retail investors have been blitzed with stories of a “Great Rotation” into equities and away from bonds. Even with prices sitting at 5-year highs… even with stocks soaring 10% in just 2 months… demand for risk assets is exceeding supply. Conceivably, this can push the S&P 500 to all-time records without much of a break.

It follows that an ETF enthusiast with excess cash may need to save some cash for a dip-buying opportunity and some cash for shoring up weak spots in the portfolio. For example, if an individual is getting all of his income from high yield corporate bonds, he/she may be missing out on unconventional income producers. Similarly, if one has been profiting primarily from U.S. stock success, he/she may want to reevaluate international prospects with better “valuations” and reasonable Relative Strength Index (RSI) readings.

Here are 2 ETFs that are worth looking at in today’s “hyper-price-appreciating” marketplace:

1. SPDR DJ International Real Estate (RWX). Inflation may not be an immediate concern for developed economies. (This is a debate in and of itself.) Yet the unprecedented level of central bank stimulus worldwide represents efforts to reflate/create higher prices. Simply put, real estate investment trusts (REITs) are uniquely qualified to hedge against rising rents and property gains.

In more general terms, international REITs may present access to rising real estate prices and rising rents around the globe, while still garnering enviable income streams. SPDR DJ International Real Estate (RWX) currently offers a fund dividend yield of 6.6% (index dividend yield of 3.8%) with only 2/3 the volatility of the S&P 500. The price-to-book of 1.07 also suggests that “this house is in order.”

Clearly, strong dividend yields and reasonable price stability offer differentiation from other assets in many portfolios. Equally worthy of note, RWX is trading in the Relative Strength Index mid-range of 50. Whereas so many assets are well above 70 and are technically overbought, the modest pullback here is refreshing.

RWX 50 200

2. SPDR S&P Global Natural Resources (GNR). If one subscribes to the notion that China turned a corner in Q4, then one would also want to revisit the natural resources sector. GNR tracks an index comprised of 90 of the largest publicly listed entities is energy, metals as well as agriculture. And yet, GNR distinguishes itself by being the lowest-cost one-stop fund for “balanced” exposure to the segment.

Granted, there are other viable “resources” investments. However, iShares S&P North American Resources (IGE) isn’t global and it is nearly 3/4 committed to energy alone. Meanwhile, WisdomTree Global Natural Resources (GNAT) is limited by negligible assets under management, potentially affecting liquidity and/or the bid-ask spread. Market Vectors RVE Hard Assets Producers ETF (HAP) may be a worthy contender, but GNR has managed to amass 5x the assets under management in a few years.

From a valuation perspective, GNR has a similar 30-day SEC yield to the S&P 500, with a lower forward multiple (P/E). More compelling is the reality that GNR would have to rise nearly 17% from its current level to reach the price heights achieved in April of 2010. Unlike many other assets that are sitting on 52-week peaks, GNR may have room to run.

GNR 50 200

You can listen to the ETF Expert Radio Show “LIVE”, via podcast or on your iPod. You can follow me on Twitter @ETFexpert.

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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