Robert Powell is a long-time financial journalist and retirement expert, as well as the editor of Th...
2 ETFs for the Time Being
01/23/2012 7:30 am EST
While the early market upswing is a relief, there are a lot of potential hazards that need to be cleared before this little trend becomes something significant, writes Doug Fabian of Making Money Alert.
Stocks are off to a solid start in 2012. So far this year, the S&P 500 index is up about 2%. Of course, a move higher in stocks at the beginning of the year is a common phenomenon. In fact, there’s even a name for it—it’s called “the January effect.”
The January effect rally is usually attributed to the increased buying of stocks following end-of-year tax loss selling in December. This year, however, we’re seeing a lot of money come out of cash and bonds and back into the market from mutual funds, pension funds, and increased 401(k)-type plan contributions.
The move into stocks so far this year has pushed the S&P 500 back above the technically significant 200-day moving average and, as of this writing, back above the 1,300 mark.
I must say that I think stocks have been remarkably resilient this year, despite some rather downbeat news. But I suspect that the January effect is largely responsible for much of the gains.
In terms of negative news, we’ve seen earnings from big financials come in tepid at best, and the news out of Europe isn’t getting any better. In fact, we saw ratings agency Standard & Poor’s downgrade the credit rating of nine European countries.
S&P lowered its long-term credit rating on Cyprus, Italy, Portugal, and Spain by two notches, and cut its rating on Austria, France, Malta, Slovakia, and Slovenia by one notch. The French downgrade was the big one, as France plays a key role in the European Union and is second only to Germany in terms of fiscal might. S&P did, however, affirm Germany’s credit rating.
On the economic front, we had some slightly better-than-expected GDP growth figures from China, and that gave markets a boost. However, the rate of growth in China’s economy is slowing, and the nation now is growing at its slowest pace since the Great Recession in 2009. China’s slowing, along with the imminent slowdown in Europe, is going to put a lot of pressure on the global economy.
In fact, we received word that the World Bank warned developing countries to prepare for the “real” risk that an escalation in the Euro debt crisis could tip the world into a slump on a par with the global downturn in 2008-09.
The World Bank concluded that Europe was probably already in recession and, if the Euro debt crisis deepened, global economic forecasts would be significantly lower. Already, the World Bank is predicting global economic growth of just 2.5% in 2012 and 3.1% in 2013. That’s well below the 3.6% growth for each year projected in June.
The bottom line here is that there are a lot of potentially disastrous events on the horizon that could really do some damage to the equity markets. The kind of damage we’re talking about is no match for a modest January effect.
I am currently advising readers to remain cautious with respect to their allocations to this dangerous market. I think there is just too much potential peril here for investors, and that means cash could be your best friend in the months to come.
If You Invest, Low Volatility Is Best
Halfhearted optimism could be the phrase that best describes how investors are feeling, as we’ve seen a nice rally during the past two weeks of trading. With few, if any, of the major headwinds having been resolved yet, we also can expect the market to be susceptible to significant volatility in 2012.
Fortunately for cautious investors, PowerShares recently launched two new exchange traded funds (ETFs) that focus on low-volatility stocks: the PowerShares S&P Emerging Markets Low Volatility Portfolio (EELV) and the PowerShares S&P International Developed Low Volatility Portfolio (IDLV).
The rationale behind the launch of these new funds is simple. There are plenty of opportunities for investors in the developed and emerging markets, but rocky conditions can wreak havoc on an otherwise diversified portfolio that features good investments.
For EELV, its top holdings include: Global X FTSE Colombia 20 ETF, 4.10%; Cathay No 1. REIT, 1.34%; Maxis Bhd, 1.18%; Public Bank Bhd, 1.16%; Nestle (Malaysia) Bhd, 0.97%; Taiwan Secom Co., 0.93%; Redefine Properties, 0.83%; Chunghwa Telecom Co. 0.80%; UMW Holdings Bhd, 0.76%; and Malyan Banking Bhd., 0.75%.
As for IDLV, its top holdings, including consumer staples and utilities companies that performed remarkably well in 2011, are: TrustPower Ltd., 0.96%; Great Eastern Holdings, 0.83%; Singapore Press Holdings, 0.81%; Nissin Foods Holdings Co., 0.78%; Bell Aliant Inc., 0.77%; Goodman Property Trust, 0.74%; Port of Tauranga Ltd., 0.71%; Nankai Electric Railway Co., 0.71%; SMRT Corp., 0.70%; and Kiwi Income Property Trust, 0.68%.
As we continue into the new year, the first half likely will be the most volatile, as Europe forges debt-relief plans, as trading volume stays fairly low, and as reduced growth expectations are factored into the share prices of European and US stocks.
While the biggest market-moving events are difficult to predict, low volatility ETFs such as EELV and IDLV could offer ways to stabilize your portfolio’s performance in 2012.
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