5 ETFs to buy this week

Staying cautious can keep you one step ahead of the market

By Jamie Dlugosch Jun 6, 2011 9:44AM

Poor economic news, including a weak jobs report, pushed stocks over the brink last week. About the only silver lining for investors was low volume, at least at the start of the holiday-shortened weak.

 

Imagine where we might go with a full lineup of traders ready to pounce on the slightest bad news. Sentiment has clearly shifted to the negative. Not even strong corporate earnings have helped.

 

The focus is on the future, and the market does not like what it sees. What the market needs now is a dose of good news. The most likely timing of that news is when second-quarter earnings are released, but that does not happen until July.

 

Keep your powder dry until then. On the long side the ETF to buy this week is the dividend play PowerShares Dividend Achievers (PFM)

 

Irrespective of the current view, stocks seem a bit oversold. I dipped my toes in on the long side and got caught in the downdraft. That said, I did recommend a short of the small-cap sector. Cashing in that insurance policy kept the damage to a minimum and well ahead of the rest of the market.

 

In fact, following the five picks in this column each and every week this year has generated a return of nearly 9%. That is well ahead of the 2.25% return and more than meets the objective of an absolute return approach.

 

What I try to do here is minimize risk while maximizing return. So far this year, mission accomplished. I expect more of the same this week. I'm not changing a thing with my picks. My bias at the moment is long, and I think we have taken the brunt of the selling medicine.

 

Here are the five ETFs to own this week:

 

ProShares Short Russell 2,000 (RWM). This was the ETF to own last week. The RWM single handedly crushed the other four picks here with a positive return of more than 3%. Those cashing that insurance policy beat the market last week. Keep the policy on as the premiums are minimal compared to the damage saved if the market should continue to fall.

 

iShares S&P North America Technology and Multimedia Fund (IGN). Bad timing adding this fund to the mix last week. Not only did the market open higher, it then promptly sold off the remainder of the week. With selling reaching yearly lows, the market appears to be a bit oversold. I would give this fund a bit more time to do its thing. For certain I want to own this in anticipation of what I think will now be a strong summer rally set to begin in July.

SPDR Dow Jones Industrial Average (DIA). Selling was across the board last week. Not even the large caps were spared. From a valuation standpoint, I still prefer the bigger names in the market on the long side.

 

PowerShares Dividend Achievers (PFM). Can’t decide which way the market will go? Perhaps we are set for a long period of sideways trade. If so, sit back and collect your dividends. This is a good fund to own during a period of market uncertainty.

 

SPDR S&P 500 (SPY). Looking for large cap exposure keeps us in the S&P 500 this week. I’m not particularly enamored with this particular index, but I like how it balances the other picks here. Remember the goal is to deliver absolute returns first and then beat the market second. This fund along with the others does just that.

 

Keep an equal weight in the five picks above.

Tags: etf
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