What will be the 5 best ETFs for 2013?
ETF investors are closing the book on 2012 and starting to look ahead to determine what might be the best ETFs for 2013.
The typical year end forecasts abound regarding what ETF investors can expect for the New Year. Looking ahead, it seems that the skies look particularly cloudy and that continued slow growth, or even recession, is a growing possibility for the U.S. economy in 2013.
If this forecast is realized, 2013 could be a tough year for investors in traditional index ETFs. Read “Jeffrey Hirsch Reveals Stock Trader’s Almanac’s View of 2013″
Here are some specific details of the likely environment ETF investors will be facing in 2013:
1. Regardless of how the fiscal cliff negotiations turn out, taxes are going up and government spending is going down in 2013 which will be an increased drag on the already slow growth U.S. economy.
2 In Europe, recession is a reality as the economy contracted by 0.1 percent in the Eurozone last quarter and 0.6 percent on a year over year basis. Many economists expect Britain’s economy to contract during the fourth quarter, as well.
3. Across the world in Asia, Japan is also officially in recession with two consecutive quarters of negative GDP.
4. With America’s major trading partners in recession, the question arises as to whether slackened demand for our exports to those countries could cause our own economy to contract to the point of recession – even if the fiscal cliff doesn’t get us.
5. Recent reports regarding consumer confidence and sentiment also point to declining consumer confidence and so it does not appear realistic to expect the American consumer to pick up the slack resulting from reduced demand for our nation’s exports. Read “Weakest Holiday Sales Growth Since 2008″
6. Finally, according to data compiled by Stock Trader’s Almanac, the worst year of the 4 year Presidential election cycle is the first year of a newly elected President’s term and this could be particularly acute given the upcoming fiscal cliff problems and debt ceiling debate.
Adding all of these factors together, it appears that the individual investor needs to be ready for a stock market retreat during 2013. As the old saying goes, the best offense is a good defense, and the following ETFs could help investors develop defensive portfolio strategies for whatever adversities 2013 might bring:
Ranger Equity Bear ETF (HDGE)
This ETF actively shorts various U.S. companies and current holdings include Goodyear (GT), Chipotle Mexican (GMG), Cliffs Natural Resources (CLF) and Fossil (FOSL). This ETF comes with a management fee.
ProShares QQQ Short ETF (PSQ)
This ETF is designed to correspond to the inverse (-1x) of the daily performance of the NASDAQ 100 Index. The fund invests in derivatives which ProShares Advisors believes should have similar daily return characteristics as the inverse (-1x) of the daily return of the index. The NASDAQ 100 Index, a modified market capitalization-weighted index, includes 100 of the largest non-financial domestic and international issues listed on The NASDAQ Stock Market.
ProShares Short Russell 2000 ETF (RWM)
This ETF is designed to correspond to the inverse (-1x) of the daily performance of the Russell 2000 Index. The fund invests in derivatives which ProShares Advisors believes should have similar daily return characteristics as the inverse (-1x) of the daily return of the index. It is a float-adjusted, market capitalization-weighted index containing approximately 2000 of the smallest companies in the Russell 3000 Index.
PowerShares DB US Dollar Index Bullish (UUP)
This ETF tracks the price and yield performance of the Deutsche Bank Long US Dollar Futures index. The index is comprised solely of long futures contracts. The futures contract is designed to replicate the performance of being long the US Dollar against the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc.
Utilities Select Sector SPDR ETF (XLU)
This ETF is designed to correspond to the performance of publicly traded equity securities of companies in The Utilities Select Sector Index. The Utilities Select Sector SPDR ETF generally invests at least 95% of its assets in the securities comprising the Utilities Select Sector Index, which includes companies from the following industries: electric utilities; gas utilities; multi-utilities; independent power producers and energy traders.
Bearish ETFs can help reduce losses should a decline take place and can also provide an avenue to seek profits even when major markets turn down. Important caveat: Inverse ETFs can develop large tracking errors over time and so investors need to fully understand how these are calculated and how they operate. Read the Disclosures closely and understand that they are priced on a daily basis and so are suitable only for experienced traders and investors with well thought out trading plans.
In the event of a decline in equities in 2013, Utilities ETF (XLU) can offer a defensive strategy as utilities are often viewed as conservative holdings that pay dividends. The U.S. Dollar (NYSEARCA:UUP) should also benefit from any sort of down market as the dollar is still seen as a “flight to safety” trade by global market participants.
Bottom line: As we enter 2013, numerous fundamental and seasonal factors point to the possibility that the New Year will be difficult for stock market and ETF investors and could be a sideways to down year for global equity markets. As always in today’s post-crash world, a sophisticated, disciplined approach to investing could likely yield the best results in the New Year.