As the economic outlook gets murkier heading into the so-called fiscal cliff, investors should stick to high-quality stocks and exchange traded funds. Moreover, investors shouldn’t overlook opportunities in the emerging markets and fixed-income space.
Steven Goldberg for Kiplinger said that investors “can still buy high-quality blue-chip stocks at discounted prices.” Goldberg provides a few suggestions on where ETF investors can turn to.
The Vanguard Mega Cap 300 Growth ETF (NYSEArca: MGK), which tracks the faster growing half of the MSCI US Large Cap 300 Index, has averaged one percentage point per year better than the S&P 500. Mega-cap growth stocks have historically traded at higher P/E ratios, but after the series of bearish turns, the holdings have an average 16 times estimated 2013 earnings. [iShares: Mega-Cap ETFs for a Low-Growth Environment]
The Vanguard Dividend Appreciation ETF (NSYEArca: VIG) holds high quality stocks as it targets companies that have raised dividends in each of the past ten years and firms that have strong balance sheets. The ETF’s objective is even good enough for Warren Buffett’s Berkshire Hathaway, which recently bought more than 5% of its shares. VIG comes with a 2.3% yield. [A Dividend ETF That Focuses on Quality Companies]
The Market Vectors Morningstar Wide Moat ETF (NYSEArca: MOAT) includes Morningstar’s pick of companies with the strongest barriers against competitors. Consequently, these companies enjoy a greater competitive advantage and sit comfortably in an “economic moat.”
For the emerging markets, the Vanguard MSCI Emerging Markets ETF (NYSEArca: VWO) is Goldberg’s choice. The ETF looks relatively cheap as its holdings trade at 11.6 times estimated 2013 earnings. Looking at the original Vanguard Emerging Market Fund, it has returned an annualized 15.6%. Nevertheless, as an emerging market investment, investors should be aware of that these securities are on the riskier side – VWO dropped 18.8% over 2011. [Hot Single-Country Emerging Market ETFs]
The Vanguard MSCI EAFE ETF (NYSEArca: VEA) provides diversification into developed economies outside the U.S. The ETF will help capture the upside once Japan and Europe solve their problems. The holdings currently trade at an average 11 times estimated 2013 earnings, compared to the S&P 500 at 13 times.
For the bond investors, Goldberg suggests looking at the Vanguard Intermediate-Term Corporate Bond ETF (NYSEArca: VCIT), which holds a portfolio of investment grade single-A bonds. VCIT has a 2.5% yield. However, if interest rates on similar bonds rise by 1%, the ETF could drop 6%. As interest rates hover around historical lows, it is more likely for yields to rise than fall.
The iShares S&P National AMT-Free Municipal Bond (NYSEArca: MUB) provides a tax-free option. Although, the ETF only yields 1.5%, or equivalent to a 2.2% for a taxpayer in the 35% bracket. If interest rates rise 1%, the fund may also decline 6%. [Muni Bond ETFs: Year in Review and 2013 Outlook]
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Max Chen contributed to this article.