We’re just a few weeks into a new year, and it’s gotten off to a decent start. Along with a new year comes new investment trends, and for the next 11 months, you’ll want to have these exchange traded funds (ETFs) on your radar.
These are asset classes and sectors that have been showing signs of life. If the economic recovery continues, these areas could continue to do well.
Agriculture
If you haven’t noticed already, the price of goods is rising. Commodities are a great way to hedge rising prices. They tend to benefit on the diminished strength of the U.S. dollar – since commodities are denominated in dollars, a depreciation in the dollar usually means that foreign investors may buy more commodities.
Here’s how crazy food prices are getting: an index of 55 food commodities tracked by the Food and Agriculture Organization gained for a sixth month to a record in December, surpassing the previous all-time high reached in June 2008.
Record fuel prices, weather- related crop problems, increasing demand from the growing Indian and Chinese middle classes, and the push to grow corn for ethanol fuel all contributed to the crisis in 2008. Those issues continue to impact food prices today.
The United Nations has sounded the alarm, too: the world will face a food price shock, and agricultural commodity prices are likely to rise further. There is nothing indicating this is the peak, and prices should stage their rise well into the new year. Agricultural products such as wheat, corn, vegetable oil, dairy products, sugar and meat are all at risk.
- PowerShares DB Agriculture (NYSEArca: DBA): Tracks a basket of futures that includes corn, soybeans, sugar, cattle, cocoa, coffee, cotton lean hogs and wheat.
- Market Vectors Agribusiness (NYSEArca: MOO): Tracks an index of global agricultural commodity producers.
Energy
Energy prices are something everyone can relate to. Fuel touches nearly every corner of our lives, from the cars we drive to the plastic bottles from which we drink our water. That demand has been threatening to push prices sharply higher.
There are two common questions regarding the price of oil: “Why is the price so high?” and “Why is the price so low?” Generally, supply and demand dictates the answer to those questions.
Many investment banks and commodity analysts have a bullish outlook on oil prices for 2011 as a result of the U.S. economic recovery, loose monetary policy and strong demand from the emerging markets. If oil continues to get more expensive, you can play those high prices with these funds:
- Futures. PowerShares DB Oil (NYSEArca: DBO), United States Oil (NYSEArca: USO) and United States 12-Month Oil Fund (NYSEArca: USL) all track a basket of futures contracts. Before you dive in, though, be sure to understand contango, how it could affect these funds and how their various strategies mitigate it.
- Equities. If you’d rather not deal with the complexities of futures-based funds, try equity funds that track oil producers, such as iShares Dow Jones U.S. Oil Equipment & Services Index Fund (NYAR: IEZ), PowerShares Dynamic Oil Services (NYSEArca: PXJ) and SPDR S&P Oil & Gas Equipment & Services (NYSEArca: XES).
- Leverage. For the more intrepid of you, there are leveraged and inverse oil funds, such as ProShares Ultra Oil & Gas (NYSEArca: DIG), Direxion Energy Bull 3x Shares (NYSEArca: ERX) and ProSharesUltraShort SJ-UBS Crude Oil (NYSEArca: SCO).
Precious Metals
Growing on safe-haven demand, precious metals have been attracting more conservative investors, despite a short-term pullback. Gold prices have also been gaining as governments maintain low rates to aid their economies. An influx of cash that has gone toward supporting flagging economies could eventually lead to inflation, and investors are positioning themselves early with precious metals. Investment demand, whether it’s just because, the need for a safe-haven or diversification, is strong and getting stronger.
Owning physical metals is easier than ever, thanks to ETFs. All you have to do is call your brokerage to buy the fund; storage and security are handled for you.
This space is expected to grow in the coming months and years. For now, the physically-backed options you have include:
- ETFS Silver Trust (NYSEArca: SIVR) and iShares Silver Trust (NYSEArca: SLV)
- SPDR Gold Shares (NYSEArca: GLD), iShares COMEX Gold Trust (NYSEArca: IAU) and ETFS Physical Swiss Gold Shares (NYSEArca: SGOL)
Short-Term Bonds
In their search for yield along with safety, millions of investors have poured into long-term Treasury bonds throughout the financial crisis.
But long-term bonds are not where you want to be when interest rates rise. In fact, we’re already seeing a reversal in long-term bonds.
The reversal in the long-term Treasuries means that bond prices are falling and yields are rising; if you bought bonds at the higher price, you could be losing principal right now. If you’re not paying attention, these moves could be a cold splash of water in the face.
Still, if you want to invest in Treasuries, it is suggested that holding short-term Treasury securities is currently safer than holding long-term T-notes. You can get this exposure in funds such as SPDR Barclays Capital 1-3 Month T-Bill ETF (NYSEArca: BIL) and PIMCO 1-3 Year U.S. Treasury (NYSEArca: TUZ).
If you would rather short long-term Treasuries, that’s an option with ProShares UltraShort 20+ Year Treasury (NYSEArca: TBT) and Direxion Daily 30+ Year Treasury Bear 3x Shares (NYSEArca: TMV).
Small-Caps
Good things come in small packages. Last year, large-caps jumped 12.8%, but that wasn’t enough to beat either mid-caps, which rose 24.9%, or small-caps, which gained 25%.The average company in the Russell 2000 posted a 165% gain in income last year, the most since 2003, as S&P 500 profits rose 29 %, according to data compiled by Bloomberg.
Profits among smaller companies rose five times faster than larger ones last year, and analysts’ predictions show the outperformance will continue. An 80% jump in profit for small-cap shares has been forecast for 2011.
Additionally, small-cap favoritism often seen in January may be enough to cancel out thoughts of another asset class. In all Januarys since 1926, according to Fama and French, the smallest-caps have beaten the largest-caps by a huge amount — 7%, on average, in fact.
- PowerShares S&P SmallCap Financials (NYSEArca: XLFS)
- iShares S&P SmallCap 600 Index (NYSEArca: IJR)
- Schwab U.S. Small-Cap (NYSEArca: SCHA)
- WisdomTreeSmallCap Dividend (NYSEArca: DES)
Getting Started
There’s no way to predict what the markets will actually do this year, of course. Although these are ideas, we suggest you sign up for alerts to be notified of trading opportunities in any of these asset classes – or others that we didn’t mention.
If you’d rather have a ready-made portfolio containing these asset classes, consider using one of our model portfolios. You can find them all here…or build your own!
For full disclosure, Tom Lydon’s clients own shares of MOO, DIG, SLV, GLD, TBT, SCHA and IJR.