Three ETFs for a Tough Market

12/17/2008 12:00 pm EST

Focus: ETFS

Richard Young

Editor, Young's Intelligence Report

Richard Young, editor of Intelligence Report, finds three diverse ETFs that may produce strong relative performance.

In an utterly depressing year, there have been few places to hide. A vicious deleveraging cycle infused unforeseen valuation risk into equities. Big blue-chip household names are selling at Depression-era prices. Stocks' yields are now at a post-World War II high on an after-tax basis, and earnings multiples are at their lowest point in three decades. And the economic environment shows no signs of near-term improvement. Where do you begin to invest in such an environment?

First, remind yourself that financial markets are forward-looking. The Depression-era pricing in stocks is already discounting a truly treacherous environment in 2009. The bulk of the price adjustment has likely been made, but there will be much more bad news to come.

Strong relative performance is little comfort when returns are negative, but it does offer one advantage—improved buying power—by investing in beaten-down sectors of the market that are now available at discounts of up to 50% from where they were selling just a few months ago.

I am adding three ETFs: Vanguard Dividend Appreciation Index (NYSEArca: VIG), Vanguard Consumer Staples Index (NYSEArca: VDC), and iShares MSCI Canada (NYSEArca: EWC).

The Vanguard Dividend Appreciation ETF tracks the Mergent Dividend Achievers Select Index.  The fund is a nice mix of blue-chip companies with a reliable record of consistent dividend growth. To qualify as a Mergent Dividend Achiever, a company must have increased its regular annual dividend for at least ten consecutive years. Among the fund's top holdings are Johnson & Johnson, PepsiCo, McDonald's, General Dynamics, and Kimberly-Clark. Buy the fund today with a yield of 2.6%. (It closed above $40 Tuesday—Editor.)

Vanguard Consumer Staples ETF offers exposure to the MSCI investable consumer staples sector at a rock-bottom expense ratio of just 0.20%. Consumer staples are, of course, the necessities in life. Among the fund's top holdings are many household names, including Coca-Cola, Kraft, and Colgate-Palmolive. Consumer staples companies outperform during recessions. (It closed below $59 Tuesday—Editor.)

[Meanwhile,] the Canadian dollar has collapsed versus the US dollar. Last summer on a Harley trip to Prince Edward Island, we were handed $1 Canadian for our US dollars. Now the exchange rate is $1.25 Canadian per US dollar. The Canadian dollar is now undervalued and cheap.

Also, Canadian banks are in better shape than are US banks, interest rates [have been] a little more favorable in Canada, [and] Canada runs a current account surplus along with a budget surplus.

You can add deeply depressed energy and metals prices (big Canadian exports) and the probability that Canada is less exposed to threats of an al-Qaeda attack. Canadian stocks [also] are trading at 8.6x earnings and yielding 4.3%.

Lots to benefit from in relative terms. I'm buying EWC and will slowly build my position over the next year. (It closed below $17.50 Tuesday—Editor.)

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