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The ETFs to Buy in an Uncertain Market (And When Has It Been Otherwise?)


A bad event in a stock can make the stock immediately go down. ETFs can be volatile, but less so.

ETFs to Consider

The nature of investing using exchange traded funds is different than investing or trading stocks. When investing and trading stocks there can be real surprises, good as well as bad. A bad event in a stock can make the stock immediately go down. ETFs can be volatile also, and large losses can occur. But ETFs are made up of many companies, and it would take a reversal of an entire asset class for all the companies in a class to be affected. Also asset class reversals usually take a length of time to occur, where with stocks a buy or sell event can take very little time.

The Nasdaq-100 (NASDAQ:QQQ) seems reasonably valued, selling at about 15 times earnings. A significant reason why QQQ hasn't performed vs. the S&P 500 is because Apple (NASDAQ:AAPL) has gotten hit, and AAPL is a large part of the index, comprising about 12.6%. AAPL might be bottoming, selling at less than 9x earnings. Also AAPL could have upside surprises. It is estimated that US sales of Apple's Mac computer increased by 31% in January 2013 when compared to January 2012. Also, although QQQ is comprised of about 12% AAPL, other companies are prominent in the index and could help QQQ's performance. Microsoft (NASDAQ:MSFT) and Google (NASDAQ:GOOG) together comprise over 13% of QQQ. Both of these companies have performed fairly close to the S&P 500 year to date.

Another ETF to consider, although there is more risk, is the WisdomTree Emerging Markets Equity Income Fund (NYSEARCA:DEM). DEM pays a dividend of 3.38%, and sells about 11.5 times earnings, which is a reasonably low valuation. The risk is in the weighting of the index, which is comprised of about 30% in China and Russia, countries that might not perform. Global correlations have broken down as emerging markets have not participated in the global market rally. Emerging markets in 2013 have had their worst first quarter performance since 2008. This is the first time the sector has not outperformed the other countries during a bull market since 1998. An investor in DEM might have to be patient. Longer term investors have been rewarded with emerging markets investments, since the group outperformed the S&P 500 over the longer term.

Sentiment is not on the side of emerging markets. According to the March 2013 BofA Merrill Lynch Fund Manager Survey, managers have increasing confidence in the US dollar and US equities and decreasing confidence in emerging markets. The highest level of dollar bullishness was registered in March, with 72% of respondents expecting the US dollar to appreciate over the next year. In January 2013, 19% of the respondents said they wanted to underweight the US vs. the latest survey in which 5% said they wanted to overweight the US, a 24% change in positive sentiment. Only 14% expect the China economy to be stronger than next year.

Of course, when sentiment is low buyers can buy low, and there could be upside surprises in the economic growth in the emerging markets.

Editor's Note: Max Isaacman is the author of Blizzard of Money, Winning with ETF Strategies, Investing with Intelligent ETFs, How to Be an Index Investor, and The NASDAQ Investor.
Positions in DEM and QQQ.
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