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2 Broad Funds for the Second Half

07/14/2011 12:30 pm EST

Focus: FUNDS

Jim Lowell

Senior Partner & Chief Investment Strategist, Adviser Investments

Regardless of the troubles in the market, big companies are doing just fine, so it’s a good time to profit on their profits, writes Jim Lowell of Forbes ETF Advisor.

So far, 2011 has seen more than its share of changes, from rankings, to market drivers, to sector leaders. But “no change” was the theme for the month of June:

  • “No change” rang out as a vote of confidence in the Greek prime minister was made;
  • There was no change in the MSCI Emerging Markets Index, which could have lent problematic tax and return issues to both the index and the funds that benchmark to it;
  • And no change in rates from the Fed, of course.

Still, throughout June there were concerns over not being able to maintain various modes of status quo, from Dow 12,000, to "slow growth not no growth," to blood not running in various Eurozone streets.

I think the mid-year mark finds the markets changed by a factor of fear that could take a toll on fundamental factors in the quarter ahead.

As such, July’s markets remain as prone as ever to event-driven news, with one exception. While I find it equally hard to argue for much less of an undertow than the one we’ve had to swim through this past month, at the same time I see fundamentals—specifically as they relate to earnings, and the next round that kicked off Monday—as lending more potential for surprises on strengths than weaknesses.

True, the earnings reports will likely reflect a pullback from the torrid recovery pace of the past quarters. But current consensus has worried estimates to a hurdle that may be easier to jump than price in.

True, beating consensus estimates isn’t as important, nor as significant, as the internal pace of growth, as well as the proffered forecasts. But on days when we get such hat tricks, particularly among leadership names that frame an industry, sector, or region, we’ll see the fear of powder kegs turning into cheers for fireworks.

It is true that of late the headwinds have been mounting and not dissipating, making it unwise (and hence unlikely) for much positive pontificating about future earnings. However, our buffers and overall portfolio defense remains our most prudent investment offense.

First, sell Rydex S&P Equal Weight (RSP), if you have it, and buy SPDR S&P Dividend (SDY). Next, sell the PowerShares QQQ (QQQ) and buy the SPDR Dow Jones Industrial Average (DIA).

SPDR Dow Jones Industrial Average (DIA)
I think the stage is perfectly set for multinational mega-caps…and this is the granddaddy of them all. The ETF seeks investment results that correspond to the price and yield performance of the Dow Jones Industrial Average.

It began trading in January 1998, and has a market value of over $9.5 billion. The top three sectors are industrials (23.2%), information technology (16.4%), and consumer staples (13.6%).

The Top Ten holdings are IBM, Chevron, Caterpillar, 3M, United Technologies, McDonalds, Exxon Mobil, Boeing, Johnson & Johnson, and Coca Cola.

SPDR S&P Dividend (SDY)
A perfect complement to DIA, this ETF is based on the S&P High-Yield Dividend Aristocrats Index.

The index relates the performance of the 60 highest dividend-yielding S&P Composite 1500 companies that “have followed a managed dividends policy of consistently increasing dividends every year for at least 25 years”.

The result is a balance-sheet complement to the megacap stock and yield story based on a very different way to tell the tale—consumer goods, utilities, and industrial names account for 55% of the assets in this ETF. It began trading in November 2005, and has a market value of $5.8 billion.

The top three sectors are consumer staples (20.8%), financials (15.5%), and utilities (13.6%). The Top Ten holdings are Pitney Bowes, CenturyLink, HCP, Cincinnati Financial, Consolidated Edison, Kimberly Clark, Leggett & Platt, Abbott Labs, Questar, and Johnson & Johnson.

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