3 ETFs for Tactical Allocation

07/06/2012 7:30 am EST

Focus: ETFs

Asset manager Hank Mulvihill discusses some ETFs that he uses to achieve certain objectives in client portfolios, and explains how he views the combination of growth, income, and index investing-and what's currently showing the best returns.

Kate Stalter: Today, I am pleased to welcome back a frequent guest here on The Daily Guru, Hank Mulvihill of Mulvihill Asset Management.

Hank, let's start out with a question that's just been on everybody's mind lately, which is yield. Obviously, there are a lot of ways to get yield: MLPs and pipelines in general have become popular. You and I have talked about ETFs in the past. There are also high-dividend-paying stocks, of course. What's your take on that general question?

Hank Mulvihill: Those kinds of investments, I believe, should be the core of people's investing right now. I'm sorry, but getting there on diminishing yields and ever more popular bond funds-I'm going to continue to pound the table that it is just not going to work.

Now, what is happening in the bond fund world is: More and more risk is being taken, more and more junk is being taken-and that's not just in corporates, as you witness from sovereign downgrades.

You really have to look at what you are buying in those bond funds-and it just astounds me, Kate. It really amazes me. We've had a very nice rise in equity averages for quite some period of time now, certainly for the last six months-you go back 18 \months arguably. Why, during that entire period of time, have you seen more bond fund purchases than stock fund purchases?

People are scared, nervous, and paying way too much attention to news. Meanwhile, core dividend investors are making great money, and so I'm going to keep coming back to that. Yes, I'll name some individual names, but that's my bias: If you're looking for yield, don't go chasing bonds.

Kate Stalter: I know that you have felt that way for quite some time, so that is really not a new viewpoint on your part.

Hank Mulvihill: No, I'm on record with you. I gave an interview 18 months ago with you. So yes, we've been on record with that, and clients have done well.

I'm going to give a plug for the Web site, and this is not regarding my services. This is regarding investor education. Theplan.net...go over there to the learning center. People have a lot of questions about how to do planning. We've got 150 articles out there, all compliance approved. They are fantastic, a great resource.

Kate Stalter: You mentioned a moment ago that you would be able to talk about a few specific vehicles where people might be able to find yield. What are some of your ideas in that regard right now?

Hank Mulvihill: Again, I'm sector-driven. I like to see outperformance. And it's shocking but true...hello audience: Who knew that homebuilders would be doing well? And they are. Alright, well it's a little bit weird to go buy them individually perhaps.

And who knew that many of the real estate areas are doing well? And they are. You hear a lot of bad things, but look at the performance.

Let's reduce the risk, let's not go buy individual names perhaps. A very nice vehicle is a Vanguard 100 US REIT (VNQ). They buy 100 of the top US-traded real estate trusts. That's a nice area where I think particularly right now you probably are going to do pretty well. You pick up that yield and all these REITs have been reasonably hammered over the last month and a half, and there's a chance for rebound there. Again, to all listeners, this is not individual advice; this is general market opinion.

Kate Stalter: Let's talk a little bit about the growth area, shift gears here. That has struggled since we last spoke. It's been a tough space for growth investors. Poster child Apple (AAPL) is consolidating, although there are some bright spots here and there across all market caps. How do you suggest investors treat growth at this juncture?

Hank Mulvihill: You've got to just evaluate it as risk on/risk off, unfortunately. The tsunami of retirement money has abated as the boomers are beginning to pull out rather than invest. That really was, I hate to say it, but there is a lot of underpinning to the growth story for the last 25 years off that money.

Now, there is a different quest for income versus growth, and there is more emphasis, I think, on that side of things. How to attack growth now? I'd say, again, don't go chasing with 100% of your portfolio, and be willing to perhaps do a little bit more swing trading there, as sectors move in and out of favor.

Don't chase the hottest of the hot; you're just going to get creamed. Go with the classic Investor's Business Daily sort of regimen of market in uptrend/market in correction. Use your 8-day by 20-day moving averages. Again, I'm speaking about growth now; I'm not talking about core dividend investing. In growth investing, those kinds of things-market in uptrend, the 8-day above the 20-you can play. And when it stops doing that, take your profit.

Kate Stalter: How about for investors who really just prefer to get into some kind of fund. Would that be a viable avenue for them?

Hank Mulvihill: To be doing growth investing? I think possibly. I keep a very long-term chart about growth versus income equities-who's in favor. It just went positive for, again, believe it or not, over this long period of time but, the income values are outperforming. And these don't change positions very often. They're long, slow trenders.

Right now, it's pretty clear that the world seeks income more than it seeks growth. I like the stocks. I like common stocks better than preferreds. I like all of that better than bonds, because you have a chance for some price appreciation and you get paid to sit there.

Kate, I'll continue to pound the table. Dr. Bernanke has told us that they're going to hold zero interest rates until Thanksgiving 2014; that's two-years-plus from now. OK, why won't I take some money and go allocate to core equities that are producing so much free cash that they have to distribute in dividends? I just can't see why I won't do that.

Kate Stalter: Last thing I wanted to ask you about today, Hank, which I think is a related topic: The ongoing debate in the investment world between indexed funds and more active investment management...where do you come down in that conversation?

Hank Mulvihill: I like them both, and I do both. I'm a core portfolio builder for larger accounts.

For the smaller accounts, where it's just not possible to use the full techniques, I use things like the VNQ. I use another Vanguard fund, the Dividend Appreciation Fund (VIG). I use the Alerian MLP Fund (AMLP). I used to use the exchange-traded note version of that, but now for pipelines I use AMLP.

Yes, I use ETFs as well, but I don't buy them and hold them forever. We called the 2002 crash for sure, we called the 2000 crash, we called most of the 2008 crash, and definitely called the 2009 rebound. So if you're going to be an indexer, there are times you've simply got to make a decision, pro or con.

Simple ways to do it: You're mostly going to be favorable in first quarters. OK, it's pretty simple: Like 88% of the time the last 57 years. Pretty good odds, so that's one thing, and it sure worked this year. A lot of people made their years and went on vacation on March 31. That's not a bad strategy. Simple things.

You know, I love point and figure charting. Stockcharts.com gives it away. Go look at that. When the bullish percents are high, above 65% to 70%, back off. When they are low-like they are now, 44% to 42%-put more money in.

If you are going to be an indexer, you need some sort of thing to tell you when your bell curve is too far to the right, meaning it is overbought. That's a fairly simple way to do it.

Kate Stalter: That's a great perspective, because I think when many people think about indexing, they think about it just simply long-term buy and hold, case closed.

Hank Mulvihill: Well, come on now. Kate, anybody can pull up a trailing 12-year now on the S&P 500 and see that you're exactly where you started. I mean, come on. The two great crashes and several mini-crashes in between. So pay attention is all I'm saying.

Kate Stalter: Use a little consciousness when you're looking at some of these indexes. Hank, thank you so much. As always, you've given us some fantastic insights today, always a pleasure speaking with you, and we will definitely have you back again.

Hank Mulvihill: Well, thanks, Kate. Remember the US is going to do great because we have free money available, workers, communications and transportation infrastructure, water, and food, and we're going to have falling energy costs for a long time.

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