Portfolio protection: McKenzie Slaughter's ETF selections offer high returns and diversification in a seesaw market.
A consultant to retail, financial services, and investment management firms, McKenzie M. Slaughter says she launched her New York-based research, education, and consulting firm Beyond Capital Markets (www.beyondcapitalmarkets.com) last September to help private investors, hedge and pension fund managers, and other institutional clients examine asset classes that are off the beaten path. Along with her five colleagues, she scouts and analyzes opportunities in liquid alternatives, real estate, private equity emerging markets, and traditional alternatives.
Slaughter says individual investors can also get in on the act through exchange-traded funds, or ETFs, baskets of holdings in a wide variety of assets that trade like stocks. She likes ETFs as a cost-effective way to expose portfolios to alternative asset classes. An ETF investment can spread money across a variety of holdings and track an index of stocks, bonds, currencies, or commodities. Slaughter prefers diversified ETFs since single-sector, concentrated holdings are "more prone to market swings" and are higher risk investments. She also likes low expense ratios--typically 1% or lower--for the best-managed ETFs.
To the average investor, Slaughter points out, ETFs are a relatively new investment. She recommends several resources where investors can research them, including Fidelity's ETF screener (http://screener.fidelity.com/ftgw/etf/evaluator/goto/ landing), ETFTrends.com, and Morningstar.--James A. Anderson
1 SPDR S&P EMERGING MARKETS DIVIDEND ETF (EDIV) The growth of emerging market economies in countries such as China, Brazil, India, Russia, and South Africa offers investors a potential high-return opportunity. As such, the SPDR S&P Emerging Markets Dividend ETF tracks the performance of the S&P Emerging Markets Dividend Opportunities Index as closely as possible and is spread across several global regions including Asia, where 50% of the portfolio is invested; Latin America, with a 25% slice; Europe, with 12%, and Africa, with 9%.
The ETF offers investors a way to capitalize on low Treasury yields, and generally invests in the 100 highest yield emerging market stocks that make up the Index and that represent industries such as utilities, telecommunications, financials, industrials, and healthcare. It is not limited to those funds, however. At press time, the largest holdings included Eletropaulo Metropolitana Eletricidade de Sao Paulo (3.04%), and Korea Exchange Bank (3.03%). The SPDR ETF has returned just over 10% since its inception in February while keeping expenses to a modest 0.59%.
PRICE AT REC.: $54.50 * P/E: 11
2 GREENHAVEN CONTINUOUS COMMODITY INDEX FUND (GCC) Commodity markets are another intriguing possibility. While demand for food and energy is steadily rising in both developed and developing economies, supply is stalling. That's pushing commodity prices upward. Single commodity ETFs--those that track just agricultural goods, natural resources, precious metals, or industrial metals--have recently experienced a major swing in performance; diversified commodity ETFs, however, have been less volatile. Investing in a broad basket of agriculture, gas, precious metals, and other natural resources is also a great way to hedge against inflation. GreenHaven Continuous Commodity Index Fund tracks an index of 17 commodity products in five sectors with 24% of holdings in metals, 18% energy, 18% grains, 12% livestock, and 29% soft commodities (cotton, sugar, etc.). This ETF focuses on futures contracts, which can rise faster in value than inflation and in turn can help investors protect portfolios against higher prices. The fund spreads its money evenly among all 17 commodities and rebalances daily, a move that limits its volatility. The one-year average for the GreenHaven ETF is 40.47% while the expense ratio is 0.85%.
PRICE AT REC.: $34.66 * P/E: N/A
3 VANGUARD SMALL-CAP ETF (VB) Small company stocks offer investors high growth but with volatility. An ETF that provides diversified exposure to the group is the Vanguard Small-Cap ETF. Its expense ratio is very low--0.12%--and the ETF seeks to track the performance of the MSCI US Small Cap 1750 Index. The ETF's portfolio, with more than 1,700 holdings, is spread among a variety of industries--financials and information technology are its biggest weightings--providing diversification that protects investors from a downturn in any one segment of the economy. The Vanguard ETF has reported an average annual return of 7.46% over the last three years.
PRICE AT REC.: $71.56 * P/E: 18
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|Title Annotation:||STOCK PICKS; exchange traded funds|
|Author:||Anderson, James A.|
|Date:||Sep 1, 2011|
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