This week's top buys in ETFs

With dividends and gold in focus, these funds should perform well.

By InvestorPlace Oct 4, 2010 9:20AM

ETF investing has been a lot of fun as the stock market took off in September, but exchange-traded funds and stocks vacillated last week. After the momentous run for investments in September ran out of steam, it was -- as I said last week -- a mixed bag.

 

Could we expect anything else? As the month came to an end with one of the best Septembers ever, it was only natural to have a pause.

 

In some ways, however, a pause could be considered a victory -- and an opportunity for ETF investors.

 

I offered five exchange-traded fund buys for last week to be bought in equal weight with my mythical $100,000 model portfolio.

We made a whopping $250 during the week. That beats the small fractional loss of the S&P 500 during the week. The difference was approximately 30 basis points in our favor.

 

It may not seem like much, but do that over the course of the year and you have some serious out performance.

We now turn our attention to some serious economic statistics that are due out this week. Front and center is the jobs report to be released Friday.

 

Average analyst estimates for the report are for the economy to add a modest 70,000 jobs in the period.


Given the soft summer period for many businesses this number seems just about right. I don't expect the number to be much higher or lower.

 

The lack of drama in the report should be viewed as bullish for investors. Right now the momentum for stocks is higher, and only a very weak number will derail the rally.

 

More important for investors will be the results of earnings for the just-finished operating quarter. Given the absence of earnings warnings with the obligatory lowering of expectations, I expect the period to be better than expected.

 

While stubbornly high unemployment, government debt issues and a nervous consumer the market is poised to move higher next week.

 

My prognosis for stocks at the beginning of the year was for the S&P 500 to post a gain of 10%. We have about 8% more to go to get there before the end of the year. It could be a very nice way to end the year indeed.

 

Here are my five ETF buys for this week:


SPDR Gold Shares (GLD). A strong market rally will be interpreted as inflationary by investors. That means the gold rush continues. There is no reason to jump off the gold bandwagon just yet. I’m waiting for the Federal Reserve to get much more hawkish against inflation before suggesting that the gold music will stop. Fortunately the central bank telegraphs its intentions well in advance. Investors will have plenty of warning before having to jettison gold positions.

iShares Russell 2000 (IWM). Are you interested in beta or stocks that will do better than the market in a rising stock environment? Small cap stocks are the place to be. For a small portion of the portfolio adding some sizzle is always a good idea. If you think stocks are going up this week and beyond as I do then the Russell 2000 is the place to be.

 

WisdomTree Large Cap Dividend (DLN). Damping the risk of the being exposed to the small cap space investors can balance that position by sticking to dividend stocks. These stocks should do well no matter what the overall market is doing. The key thing is to collect dividends. If corporations raise dividends given third quarter results this position should increase in value.

 

SPDR S&P Metals and Mining (XME). This position was the big winner last week and that should continue in the current week. Mining stocks do not quite reflect underlying value of their respective commodities. There is clearly a lagging effect especially in the gold market. The rapid rise in the price of gold has some in the mining space doubting the move. I wouldn’t bet against gold right now. Eventually mining stocks will reflect the current value without much worry about a move lower. Owning this fund now is an opportunity to capitalize on inefficiency in the market.

 

SPDR Dow Jones Industrial Average (DIA). The Dow Jones Industrial Average can’t get any love these days. Investors tend to view the index as a list of companies that may be dinosaurs devoid of growth. Well, maybe not that bad, but there is a certain aversion to the index. Expecting a correction this week, I want to own the index that is likely to hold up the best. That would be the Dow.

 

I would buy equal positions of all five funds mentioned here for the week ahead to stay ahead of the market.


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