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ETFs: Food for Thought

06/30/2006 12:00 am EST


Jim Lowell

Senior Partner & Chief Investment Strategist, Adviser Investments

Jim Lowell , long an expert in mutual funds, is also becoming a leading player in the developing market for exchange traded funds. His Marketwatch ETF Trader is one of the first to focus solely on this areas. Here’s his latest.

"With all major market indexes at home and abroad having already given up significant ground, I don't want to remain an ultra-bearjust a smartly defensive one, looking for a cold remedy. History has shown, time and again, that consumers can give up on just about everything but fueling their cars and feeding themselves. Enter the one sector in the marketplace that consumers can't get enough of: food and the beverages to wash 'em down with.

"Fidelity Select Food & Agriculture ( FDFAX ) is on our list. Its top ten holdings: Nestle, Unilever, Pepsico, Altria, Coca Cola, McDonald's, Kellogg's, Sysco, Starbucks, General Mills. With 53% in top ten holdings, this fund has plenty of pop and not too much fizzle if the market catches a cold. But, while the FDFAX has been around since 1985, there have been some new products on the defensive consumer staples shelves.

"Powershares Dynamic Food & Beverage ( PBJ ASE), which is benchmarked against the fund company’s own homegrown index, holds what history suggests is the better hand when the going gets tough. Top ten holdings: Starbucks, General Mills, Sara Lee, Coca Cola, Yum Brands, Kellogg's, Pepsico, McDonald's, Domino's, Sonic.

"With 45% of its assets in its top ten, you might think you'd get less volatility when compared to Fidelity Select Food & Agriculture, but the fact that this fund has 31 holdings, vs. 73 in FDFAX, suggests that it will prove to be the more volatile of the two. Owning both, however, smoothes out the lumps and spreads the risks more evenly; like Jiff on Wonder Bread.

"Of course, you need something to wash down all that good grillin' and sandwich makin'. And for the designated drivers and non-lemonade drinkers among us, that means water. Powershares Water Resources ( PHO ASE) is benchmarked against the Palisades Water Index, an index that tracks a basket of ‘companies that focus on the provision of potable water, the treatment of water, and the technology and service that are directly related to water consumption.’

"The fund’s top ten holdings: Layne Christensen, Companhia de Saneamento Basico de Sao Paulo Deposi, Watts Water, Instituform Technology, Franklin Electric, Nalco, California Water Services, Millipore, Aqua America, Pentair. That list alone makes me not want to drink the water, but, when the market's tapped out, this fund, like the two others in this strategic portfolio, ought to help you cross the desert with more than just desserts."

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