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Interview: What Are the Top ETFs for 2012?


An ETF expert predicts that tech will continue to outperfom, while energy and staples will offer stability.

Jay Pestrichelli is a 12-year veteran of online brokerage trading and co-author of a new book, Buy and Hedge: The 5 Iron Rules for Investing Over the Long Term. He recently sat down with Minyanville's Michael Sedacca to talk ETFs in 2012 and discuss the investing outlook he shares with co-author, Wayne Ferbert. What's everyone missing in the markets today? The value of protection, he says.

Click on the link below for some specific picks in ETFs and suggestions regarding how to safeguard your portfolio with options.


What's the big story for 2012?

You know, 2012 is going to be an interesting year. I think tech continues to outperform. We like where mobile's going quite a bit. We think most of the expansion is going to happen in mobile. We play tech with a couple of different ETFs. We like the (XLK), we like the Qs, those give you some pretty good tech exposure.

The other thing that we actually continue to look at is energy. We like energy, we like the (XOP), which is a mid-cap gas and oil energy ETF. We like that, to get a little mid-cap exposure. It's a little on the volatile side, so we always like to hedge ourself, but energy and tech we think are going to do pretty well.

And the one thing that's continuing to perform that we think will continue to perform is the staples. (XLP) is a good ETF that helps you get exposure to the staples. Out of all the major sectors, that one, besides the utilities, was the best-performing ETF in 2011, I think a lot of people don't realize that.

How will the elections affect the markets?

For 2012, the election year certainly will be interesting. I think a lot of the subjects when it comes to finance are going to end up being taxation. I don't think there's any way we get around some sort of rewrite on the tax code. I think taxes is going to be an impact that everybody is going to have to anticipate and change. But it depends who's in charge, right? I think probably the Republicans will do some broad, sweeping tax changes and I think that'll end up being a factor in the election. I think the Democrats will end up going in the way of focused on who they've always been focused on, right? Large companies and the ultra rich. I think those are the things that are going to impact the way the market digests it.

But it's-am I going to call who's going to win? No, but today we had some pretty interesting headlines with unemployment. The headline number continuing to go down. Certainly it puts President Obama in a spot of strength as opposed to weakness.

What is everyone else missing in the markets?

I will say this just as somebody that wrote a book about hedging-it's protection. The individual investor has to make sure that they are protecting themself. And I think sometimes they're wading into the markets and there's things out that are just going to be really rough for them to foresee. The headlines out of Europe every day, overnight, they're really difficult for the individual to anticipate.

And so I think we talk about protection quite a bit and we will continue to talk about protection quite a bit. And I just think the more and more people here about, 'Hey, hedge yourself, protect yourselves, build in some level of insurance in your portfolio,' I think a lot of people are missing that and it's our job to get the message out about it.

How would you hedge in the market today?

The thing that we look at is, we like to use the options market to provide a lot of protection. You could do it with pairs trading, if you like, or long-long, short something else because you think there'll be a divergence or convergence of the assets. But we typically like to stick with the options markets. We like to use puts to provide a lot of protection. And in environments like this where the volatility's pretty high, we'll sell away some of our upsides to pay for the puts over the long term.

But we really pride ourselves on giving people the ability to sleep well at night and the fact that they're protected. They could wake up one morning and find out that, I don't know, Spain's interest rates are 12 or whatever the number is that's going to drive people crazy. By the way, I don't even know how you get a quote on interest rates in all these different European countries. Which is part of the problem that the individual investor is having. So we say "Protect yourself." We say, get some puts into your account. Even if it's not individual positions, it could be portfolio level.

How will Europe play out?

Yeah, Europe continues to be the big story and the problem is, like I just said before, the headline news is driving so much of the U.S. markets. Listen, the U.S. fundamentals are doing fine. There's some show of recovery here. Certainly a lower possibility of a recession. But Europe is continuing to give us a little bit of a schizophrenia in the market. "I'm up, I'm down, I love them, I hate them." It's very, very difficult. So it'll continue to provide volatility for the individual and the investors in general that are out there are just going to have to figure out a way to manage through it. It's a headline-driven market right now and all the headlines are coming out of Europe.

Random thought?

Yeah, my random thought, and it might not be too random, but I'll say this: I think Bernanke is going to continue to drive interest rates down. I think he's going to try to get mortgage rates to the 3.5 or 3 level. I think, while that's unprecedented and unheard of, the fact that he's continuing to implement the policy that's going to drive interest rates down, I think that's where he's trying to go. I think he's trying to spur housing. I think he believes that housing is going to be one of the keys to our recovery. And I can't argue with him. All of a sudden, we fix the housing market, certainly it'll stop helping in a lot of other areas.

But I think we see interest rates for mortgages down in the 3 level.

Twitter: @MichaelSedacca

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