Fixed income, particularly in the area of U.S. Treasury bond ETFs. Like gold, investors are drawn to this area as a shelter from financial storm systems. The benchmark 10-year treasury note rose for a yield of 3.59% on fears that the financial system would fail.

Investors gravitated to these bonds, placing bets that the Federal Reserve would aggressively cut interest rates to boost economic growth. The biggest beneficiary were the ultra-short-dated Treasuries, which offered negligible returns in exchange for safety.

  • iShares Lehman TIPS Bond (TIP), down 2.5% year-to-date
  • iShares Lehman 20+ Year Treasury Bond (TLT), up 4.5% year-to-date

The not-so-obvious areas on our radar screen are:

Homebuilders, which for a good chunk of this year were actually doing well, despite report after report about our crumbling housing market. The news from this sector is hardly positive: single family home sales are down sharply, it’s increasingly difficult to get a loan even with near-perfect credit and we may not be near a bottom yet. When the markets begin to stage a turnaround, this and other beat-up sectors are poised to perform the best.

  • SPDR S&P Homebuilders (XHB), down 1.2% year-to-date and 6.1% below its trendline
  • iShares Dow Jones U.S. Home Construction (ITB), down 4.3% year-to-date and 8.1% below its trendline

Homebuilder ETFs

Regional banks, have for much of the year remained insulated from the wider credit crisis. Their smaller size makes them more nimble and quicker to react and bounce back when a turnaround begins. While this sector has taken a few punches in the last few weeks, it hasn’t been nearly as hard-hit as the larger financial sector, leaving it in a prime position to lead the way toward recovery once that begins.

  • KBW Regional Bank (KRE): down 5.1% year-to-date and 2.6% above its trend line

Regional Bank ETFs

For full disclosure, some of Tom Lydon’s clients own shares of TIP.

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