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4 ETFs for Another Tough Year

02/01/2012 10:45 am EST

Focus: ETFs

Jim Lowell

Senior Partner & Chief Investment Strategist, Adviser Investments

Here’s the top-down view of how the markets will fare in the coming year, as well as the ETFs to keep in your portfolio as events develop, notes Jim Lowell of Forbes ETF Advisor.

I think 2012 will be another difficult year wherein discipline will be the metric and measure of our investment success. The difficulties will most likely come from all the currently known sources…that can be summed up as any realm that is willing to risk economic gain for politician gain.

With all eyes on the Eurozone, there’s the obvious risk of an unknown impingement breaking bad. I’ll continue to look for ways to upgrade the quality of our defense on the equity fronts; preferring battleship balance sheets, necessary domestic demand themes, and emerging market revenue positioning

I’ll continue to recommend pairing strategies to balance growth risk with income hedges. I’ll remain skeptical and light on the Eurozone region and capitalization and sector ranges that promise better mousetraps, but can’t afford the cheese to put in them.

Real businesses. Real earnings. Real goods and services. Real demand. Real management. Proven managers. Managing real risks will remain my primary concern and objective and as such I’ll stay our increasingly safer-haven, domestic-focused course; and remain a dollar bull and Euro bear.

Here and there, Dow Diamonds (DIA), and iShares S&P 100 (OEF) remain steadfast (not staid) choices. I’ll also continue to look for ways to mute risk inside the fixed-income tranche of each portfolio. I’ll continue using fixed income (junk bonds like iShares iBoxx Corporate High Yield (HYG), and emerging market bonds such as the iShares JPM Emerging Markets Bond (EMB)) to help offset equity market risks, too.

There’s no doubt that most of the hurdles that were ahead of us in 2011 remain in place for 2012, at least for the first three quarters of it. But, we know that peak pessimism lows will beget buying opportunities that can stand the test of a lifetime rather than a mere election year.

I do expect to see volatility increase as politicians domestic and foreign do their level best to scare their constituencies into submissive voting blocks. Not exactly the stuff of grandeur, but clearly grist for the millstone around our domestic and global markets’ necks.

Here, we are seeing measured improvements in the jobs and correlated home markets. We know income and spending patterns pose an oblique positive to the never-ending naysayers. And even across the pond we have seen a positive in the form of no new negatives.

Still, I think you’d have to be living in a bubble to suggest that 2012 will be filled with champagne wishes and caviar dreams. That doesn’t mean that I side with those who see nothing less than meltdown.

That crowd was wrong about 2009, 2010, and 2011. Maybe they get lucky and we don’t in 2012; but I’ll stay focused on the fundamentals for signs of increasing weakness or withering strengths before I throw my lot in with them.

We’re not seeing more than a slowing down of already slow growth, and Europe’s odds of a recession in 2012, and the knock of a negative quarter here, continue to hover incrementally higher. My view remains that the markets would take such news and bake in a correction of 15% to 20% from current levels, something we should fear a lot less after having stayed in 2011’s kitchen and withstood such fires well.

After what has been a very trying year, we do have something to celebrate, very minor losses or minor gains. While I never like to see any losses, it’s unrealistic to expect that we won’t have to suffer them from time to time. Managing through them is the mark of our long-term success.

Moreover, our gains, meager though they be, are a far cry from the pervasive feeling that 2011 was total loss. It wasn’t. At least not for us.

And so, with a New Year around the corner, let me raise our glass and toast a better year ahead and a better decade to come. We’re on the field, swords drawn, and those who champion retreat may win a day, a week, or even a month or two, but the year is ours. I challenge anyone who differs to prove me wrong.

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