This past year shaped out to be quite the roller coaster ride for many investors; equity markets persevered through tumultuous, and seemingly never-ending, eurozone debt drama, while the economic recovery at home remains slow and steady at best. Heading into 2013, clouds of uncertainty continue to threaten investors’ confidence as the outcome of the much feared “fiscal cliff” has many on edge. Amid this mixed economic environment, we outline 13 ETF ideas that appear to be positioned for success in 2013 [for more ETF ideas, sign up for the free ETFdb newsletter]:
1. ETRACS 2x Leveraged Long Alerian MLP Infrastructure ETN (MLPL)
MLPs, entities responsible for storing and transporting oil and products, have lagged far behind the broad market in 2012 (most MLP ETPs are about flat for the year). But as prices have fallen in the weeks since the election, yields have jumped to extremely attractive levels. MLPs are a stable, safe source of hefty dividends–a combination that’s nearly impossible to find elsewhere in the current environment. The appetite for these securities will remain strong, and MLPL represents a way to tap into this lucrative asset class [see 101 High Yield ETFs For Every Dividend Investor].
We also think there’s a decent chance that the regulatory situation evolves in a favorable manner for MLPs in 2013. Given the ongoing struggles to create jobs and raise revenues, a loosening of restrictions on pipelines seems like a real possibility. That would potentially create new revenue opportunities for MLPs as well, and give this sector a nice boost next year.
2. iShares MSCI Thailand Index Fund (THD)
Most investors have very little exposure to this Asian economy; Thailand receives a small allocation in most emerging market funds, and is barely included in global stock ETFs. While overlooked, there’s a lot to like about this rapidly emerging economy that could be one of the bright spots of Asia in coming years. Thailand is home to a thriving labor force–it boasts one of the lowest unemployment rates in the world–and has proven to be relatively immune to slowdowns both in Asia and Europe.
With GDP expected to grow by about 5% in 2013, Thailand will be one of the world’s fastest-growing economies next year. Inflation is a non-issue (expected to be about 3%), giving the central bank increased flexibility in its efforts to continue stimulating growth. THD can be a nice way to round out emerging markets exposure, sprinkling in some Thai companies alongside the Chinese and Indian stocks found in many emerging markets ETFs.
3. Physical Palladium Shares (PALL)
The precious metal world tends to focus on gold and silver more than anything else, as these two commodities have gained somewhat of a celebrity status over the years. But many analysts are calling for 2013 to be the year of palladium, as this precious metal has been rising under the radar for quite some time. The metal has been the beneficiary of a number of high estimates from the likes of some of Wall Street’s biggest names [see Commodity Guru ETFdb Portfolio].
Citigroup found that this year’s average palladium price was around $638/oz, but predicts that prices will jump to $744 in 2013 and $925 the year after. That would mark a 44% increase in just two years for this precious commodity. PALL is a physically-backed fund that has just under $500 million in assets. The fund gained a little more than 7% in 2012, but increasing demand and concerns on the supply side of this commodity make it a candidate to run even higher in 2013.
4. U.S. Market Neutral Anti-Beta Fund (BTAL)
To say that investors are worried about the coming year and the global economy would be an understatement. It seems that the uncertainty of the country has many heading for higher ground and seeking out their favorite safe havens. One of the most effective funds on the market for hedging against tough times is BTAL, which identifies the lowest beta stocks as long positions and highest beta stocks as short positions [see Cheapskate Hedge Fund ETFdb Portfolio].
This strategy typically works out favorably in a bear environment, but not so much during a bull run. Should markets head south in 2013, BTAL will likely come away with a nice gain, but a continued bull run will probably mean bad news for this fund. This is purely a defensive investment and should only be used by those who are fearful of the coming year; if you are a bull, BTAL probably has no place in your portfolio for the time being.
5. SPDR Homebuilders ETF (XHB)
The trend is your friend for 2013, and one of the biggest trends coming into the year is the recovery of the housing sector. XHB was one of the best performers in 2012, jumping more than 50% in 2012 as the very segment that brought down the economy in 2007 and 2008 is finally seeing signs of momentum.
If 2013 is to be a strong year for stocks, XHB may be able to lead the way, as the long-awaited housing recovery seems to finally be in full force. This fund maintains a portfolio of just over 35 stocks, all of which stand to gain from a soaring housing market. Some of the top holdings include names like Lowe’s, Whirlpool and USG Corp. Note that this fund invests in companies that will benefit from a jump in this sector, not lead the way. Rather than a portfolio full of construction companies, the fund has over 65% of its assets in consumer cyclicals, all of which will perform very well should the current trend hold its ground.
6. PowerShares Senior Bank Loan Portfolio (BKLN)
The hunt for yield will continue into 2013 as central banks around the globe stick to their low-rate policies as meaningful economic recoveries begin to take root. One particular corner of the fixed income market that has been flying under the radar may warrant a closer look for those interested in generating current income without incurring handfuls of volatility. Perhaps best described as “high-yield with perks,” senior bank loans offer a compelling case separating them from the populated junk bond ETF space [see also Monthly Dividend ETFdb Portfolio].
Senior bank loans are privately-arranged debt instruments issued by a bank that provides capital to a company, usually with a below investment-grade credit rating. Where these securities differ from junk bonds is that they are secured by collateral in the event of a default. Furthermore, the underlying debt notes comprising BKLN are floating rate; while the Fed may not raise rates in 2013, the reduced interest rate sensitivity of these securities compared to traditional junk bonds makes them all the more attractive.
7. iShares MSCI Poland Investable Market Index Fund (EPOL)
This is somewhat of a dark horse pick given Poland’s economic resilience during an otherwise gloomy stretch of history for the European currency bloc. Since avoiding the most recent global financial meltdown by staying debt-free, Poland’s safe haven reputation has attracted investors who wish to remain invested in Europe, but are worried that more fragile member nations could crumble if the region’s financial burden intensifies in 2013.
EPOL presents a way to tap into the Polish economy, which has seen a tremendous inflow of foreign capital over the last few years. This ETF is tilted towards financial services and basic materials, two cyclical sectors that stand to benefit hugely from an economic rebound. We anticipate that even the slightest whiff of good news regarding the eurozone debt drama should bode well for the more stable countries in the region and ideally pave the way higher for EPOL [see our Euro-Free Europe ETFdb Portfolio].
8. First Trust ISE-Revere Natural Gas Index Fund (FCG)
With ongoing technological advances and an ever-increasing appetite for energy, it’s safe to say that natural gas is here to stay. This fossil fuel suffered a harsh decline in prices over the last year as uncharacteristically warm weather curbed demand and piled up inventory. However, natural gas remains an essential component to our consumption habits and with fracking unlocking massive, previously unreachable deposits of fuel at home, it’s no surprise that producers are embracing the opportunity for the United States to become an energy powerhouse.
Natural gas is not our ideal fuel of choice, but it offers a step in the right direction considering that it’s cheaper and cleaner than oil and not to mention available in massive quantities right here at home. FCG tracks an equal-weighted portfolio of 30 companies, mostly from the United States, that derive a substantial portion of their revenues from the exploration and production of natural gas.
9. Van Eck Market Vectors Mortgage REIT Income ETF (MORT)
REITs will continue to hold a place in income investors’ hearts as these securities demonstrated impressively low volatility along with the capability to deliver stellar dividend distributions during a rocky 2012. We feel that 2013 will be ripe with opportunities in the real estate sector as borrowing costs are expected to remain low through 2015. Adding to that, the Fed’s ongoing and open-ended QE3 program should continue to bode well for the mortgage REIT industry; the stimulus program ensures that the Fed will look to purchase $40 billion in mortgage-backed securities each month [Download 101 ETF Lessons Every Financial Advisor Should Learn].
MORT has accumulated an impressive $91 million in assets under management since launching in the second half of 2011, showcasing the sheer interest for this type of exposure among income-hungry investors. This ETF holds a portfolio of 25 U.S. mortgage REITs, which we believe are poised to continue appreciating as the Fed stands behind the industry and the domestic housing market shows clear signs of recovery.
10. Wisdom Tree Japan Hedged Equity Fund (DXJ)
This is another dark horse pick that offers lucrative upside potential for those with a bullish outlook and stomach for volatility. Japan’s exporting economy could surprise everyone in 2013 as even a slight pick-up in growth across Asia and South America can bring in big business for the nation’s global behemoths. With China’s manufacturing sector showing signs of a bottom and the Bank of Japan implementing more stimulus measures, 2013 could turn out to be the year that Japan beats the odds.
Currency exposure, an often overlooked component of international investing, can have a significant impact on bottom-line returns. As such, we’re opting for a currency-hedged ETF to deliver our Japan exposure; DXJ hedges exposure to fluctuations between the value of the U.S. dollar and the Japanese yen, thereby effectively tracking the performance of Japanese equities that is attributable solely to stock prices [see How To Invest Overseas Without Currency Risk].
11. iShares MSCI Europe Financials Sector Index Fund (EUFN)
This is our staple contrarian recommendation as it has the potential to rake in massive gains against all odds. The thesis behind this pick is fairly straightforward; any signs of “economic life” in the debt-burdened eurozone can ignite investors’ confidence and with financial securities being so beat down, investors could begin stepping away from the sidelines and bargain shopping once again.
While it won’t happen overnight, the financial sector of the eurozone may finally show signs of recovery in 2013 given the policymakers’ commitment to ensuring that the currency bloc lives on. Although headlines have tried to keep a lid on confidence it’s quite clear that bullish sentiment is slowly but surely returning overseas, judging by EUFN’s year-to-date return of about 30%.
12. PowerShares Emerging Markets Sovereign Debt Portfolio (PCY)
As investors continue to abandon their home country bias in their stock portfolios, more and more are also taking measures to diversify their fixed-income component, a trend that will likely continue into 2013. Geographic diversification and the hunt for higher yields are two of the main reasons that more and more investors are adding emerging markets bonds to their portfolios [see King Dollar ETFdb Portfolio].
PCY holds a basket of 65 government bonds issued by approximately 22 emerging market countries. The distinguishing feature of PCY is that its underlying portfolio is U.S. dollar-denominated; this feature allows it to take advantage of a potential scenario in 2013 that might spark a flight to safety in the currency market and bolster the greenback and this ETF higher.
13. Vanguard Dividend Appreciation ETF (VIG)
Negotiations concerning the “fiscal cliff” have been the center of investors’ focus in recent weeks, as many fear that the seemingly imminent automatic round of spending cuts and tax hikes will take a big chunk out of bottom line returns in 2013. And with interest rates expected to remain at rock bottom, many have already turned to certain corners of the market for any source of additional income flows. As such, the ultra popular dividend investment strategy has come to the forefront once again, and will likely remain a popular option next year.
Though many argue that 2013′s tax hikes will make dividend investing less appealing, a recent trend of companies increasing their payouts in response to investor demand may be enough compensation for those willing to take on the tax burden. If this trend continues into 2013 (which seems likely considering the slew of special dividends as of late), Vanguard’s VIG is a nice option as it targets companies that have a history of increasing dividends for at least ten consecutive years.
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Disclosure: No positions at time of writing.