5 ETFs to buy this week

Time for a little base building now that the market has crossed important thresholds.

By Jamie Dlugosch Feb 7, 2011 10:37AM

Image: Exchange-traded funds (© ThinkStock/SuperStock)Just like clockwork, the fearful trade of last week gave way to solid gains and new milestones. The S&P 500 gained nearly 3%, crossing the all-important threshold of 1,300. Anyone selling based on events in the Middle East missed out on a nice run.


This week we turn our attention to base building.


The moves above Dow 12,000 and S&P 1,300 are significant from a technical and psychological level and come after several months of impressive gains for the market.


Historically, these milestones are followed by sideways trading, and that is what I expect this week. The best way to play a sideways market is with a long/short exchange traded fund.


My choice would be ProShares Credit Suisse 130/30.


This fund uses 30% of its assets on the short side of the market. It then takes proceeds from the short sales and buys additional long exposure. That long-short exposure allows the fund to reduce downside exposure while still participating in any rallies.

That is exactly the sort of fund I want to own this week. Over the past few months, such funds have not performed well as the market has been on a tear. Even if we don’t get a correction, this fund will do well in what I expect to be a sideways market.


Our ETF picks last week gained more than 3%, beating the S&P 500 by 40 basis points. For the year, the top ETFs to buy are up more than 5%, compared with 4% for the S&P 500.


Considering I take an absolute-return approach to the market, I’ll take that outperformance any day of the week. This week I take step back from the previously aggressive stance held during January.


I’m still mostly long on the market, so no need to panic, but I want to focus on larger companies and, as mentioned above, the long-short fund.


Here are the five ETF's to own this week and why:


ProShares Credit Suisse 130/30 (CSM) – I really like this fund. It mirrors my own approach to the market. Some stocks go up, and some stocks go down. Owning stocks that are undervalued and selling short stocks that are overvalued protects capital and allows participation in an up market. This fund is perfect for where we are in the market today.


SPDR KBW Regional Banking (KRE) – The regional banking sector has been struggling a bit over the past two weeks. I’m going to stick with the group, as overall I think an improving economy will trigger consolidation. When that will happen is anyone’s guess, and the only way to participate when it arrives is to own the group. Additionally, this ETF is consistent with a more conservative approach to stocks this week.


SPDR Dow Jones Industrial Average (DIA) – The January effect is over. Smaller-company stocks took a backseat to larger stocks. That trend will continue for the remainder of the year. Dow stocks are very affordable, given strong earnings growth. Gains in the group are likely to erase those pricing inefficiencies. In a worst-case scenario of stocks losing value, this ETF will likely lose less.


PowerShares Dividend Achievers (PFM) – Another way investors can play a sideways trading market is with dividend stocks. No matter what happens directionally, a dividend stock likely keeps paying its dividend. In a period of consolidation, this dividend ETF is a nice add to a conservative portfolio.


SPDR S&P 500 (SPY) – This fund has performed nicely in 2011. That should continue in the weeks and months going forward. Like the Dow stocks, this pick is all about big stocks. That is where I find compelling value in the market. I’m protected in a down market for the most part, and if stocks gain, big stocks are likely to outperform.


Take an equal weight in each of these positions and watch your portfolio beat the market this week.


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