Smart exchange traded fund (ETF) investors not only look for opportunities in areas that are currently moving up, but they also look for opportunities that may develop in the future, long before they’re actually here.
The credit crisis and the housing bust will both eventually work themselves out, and we’re probably in the worst part of it right now. Here are some areas you should consider. Go ahead and think we’re crazy. But these are some areas that when things get better, we may come back to you in six months and tell you that these areas have had a great run.
Of course, the standard advice applies: make sure you only buy when these areas move above their long-term trend lines (200-day moving averages).
First, two pretty obvious areas:
Gold, a traditional safe haven for investors, rose on such buying after bank woes were renewed, report Moming Zhou and Myra P. Saefong for MarketWatch. The metal closed at $894.40 an ounce, and gold-focused ETFs were among the few closing today in positive territory.
- SPDR Gold Shares (GLD), up 8.8% year-to-date and 5.7% above its trend line
- PowerShares DB Gold (DGL), up 6.9% year-to-date and 5.3% above its trend line
If the dollar continues to strengthen as it did today, however, it might temper gold’s rise. The two tend to have an inverse relationship: as gold rises, the dollar falls, and vice versa. Some analysts feel that gold’s rally is yet to come and that it could hit $1,000 by year’s end. Today could be the beginning of it as investors’ nerves are rattled by the failure of the $700 billion financial bailout package.
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
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
For full disclosure, some of Tom Lydon’s clients own shares of TIP.