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Do Or Die

List of Defensive ETFs for Investing

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Hi,

 

In the recent articles regarding emerging markets ETFs part 1 & part 2 I mentioned ETFs which you can use to transfer your risk from corporate to sovereigns. If you are confident about your read on stock market, use the ETF list for Sector Rotation. Let’s look at some other options for stabilizing portfolio in current economic mess.

 

Relative momentum is currently strongest in Treasuries (IEF and TIP), Gold (GLD), and Emerging Market Bonds (PCY). Gold remains a top choice to hedge against inflation as well as stock market plunge. Gold usually rises in first half of recession period and all assets lose value towards the end of business cycle. Recently, central banks around the world have indicated that they will keep increasing their reserves of Gold.

 

If you don't feel confident buying a true-gold indicator like Goldcorp (GG), then bet on the gold-mining ETF like the Market Vectors Gold Miners (GDX) or the Global X Silver Miners ETF (SIL); the last two tend to get oversold with indiscriminate selling shadowing from stocks.

 

Gold may pull back if margin buying is curtailed or precious metals pull-back sell-off in short term. The better yet lesser known physical precious metals ETFs are Physical Swiss Gold Shares (SGOL) and the Physical Silver Shares (SIVR). The Central Fund of Canada (CEF) is selling at a premium below 10%.

 

Gold tend to be the leading indicator for most commodities, and commodities are a hedge against inflation. Most commodity sector ETFs, however, overexpose investors to the petroleum complex which suffers under a return-eroding “contango” based on business cycles. The equal-weighted GreenHaven Continuous Commodity Index Fund (GCC) minimizes this effect to deliver 12-month appreciation of 30.5 percent.

 

Single-country ETFs in Europe following Italy, Spain and other nations have been rattled by the debt crisis. However, it has triggered indiscriminate selling of several long-time, non-volatile income producers. For example, in the same period, iShares S&P Preferred (PFF) tumbled -14.1%. Similarly, energy pipeline enthusiasts are used to seeing their assets create a reliable income stream that’s similar to preferred shares. Alerian MLP (AMJ) and Credit Suisse Cushing MLP (MLPN) plummeted -13.8% and -13.7%, respectively. MLPs are not normal stocks — they don’t pay corporate taxes, but they act more like a business that passes income onto its investors as distributions, or dividends

 

Energy may pick up once the crisis begins to stabilize. The Market Vectors Coal (KOL) fund tries to reflect the performance of the Stowe Coal Index, which tracks global companies engaged in the coal industry.

 

And then, there is certainly the option of investing in defensive sectors of Utilities, Healthcare, Consumer Goods and Telecommunications in emerging markets. The GEMS allow an exposure in emerging market sectors.

Financials GEMS ETF (FGEM)

Consumer Goods GEMS ETF (GGEM)

Health Care GEMS ETF (HGEM)

Industrials GEMS ETF (IGEM)

Basic Materials GEMS ETF (LGEM)

Energy GEMS ETF (OGEM)

Technology GEMS ETF (QGEM)

Telecommunications GEMS ETF (TGEM)

Utilities GEMS ETF (UGEM)

Consumer Services GEMS ETF (VGEM)

 

High Quality Bonds

The iShares iBoxx Investment Grade Corp Bond ETF (LQD) is a good diversified option with a 4.5% yield from high quality names like AT&T (T). In these times of crisis, these bonds are preferred to non-investment grade junk bonds like SPDR Barclays Capital High Yield Bond ETF (JNK). On the fixed-income side, an allocation to the iShares Barclays Capital TIPS Bond Fund (TIP) offers a 3.9 percent current yield. The ETF TIP gained 11.8 percent in the past year.

 

There are currently four ETFs in the Emerging Markets Bond ETF Category which offer exposure to this slice of the market. Currently, two products–the iShares JPMorgan USD Emerging Market Bond ETF (EMB) and the PowerShares Emerging Markets Sovereign Debt Fund (PCY)–offer exposure to bonds denominated in U.S. dollars, while another two–the WisdomTree Emerging Markets Local Debt ETF (ELD) and the Market Vectors Emerging Market Local Currency Bond Fund (EMLC)–target bonds denominated in local currencies. While there are pros and cons to each type of exposure–generally speaking, dollar-denominated bonds take out the currency risk for the American investor, but may offer lower interest rates than local currency debt.

 

Some top picks in the emerging markets universe include SPDR DB Intl Govt Infl-Protected Bond (WIP), PowerShares Emerging Mkts Sovereign Debt (PCY), and SPDR Barclays Capital Intl Corp Bond (IBND).

 

 

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