3 ETFs to consider owning in 2013
Energy, emerging market bonds and Canadian small-caps look promising after a volatile year.
As investors prepare to flip the calendars to 2013 at the end of the month, they are hoping that major indexes can cling to surprisingly strong gains posted during what most will remember as a period of significant volatility and general unpredictability. Despite some lingering risk factors, 2012 has been a generally impressive year for stock markets around the globe.
As we head into 2013, these risks will of course remain front and center. The year ahead promises to bring more volatility as we navigate a fiscal cliff, low interest rates, and challenges in the labor market. But there are some intriguing opportunities ahead in 2013.
Alerian MLP Infrastructure ETN (MLPI)
Master limited partnerships (MLPs) have enjoyed a surge in popularity in recent months as investors have aggressively sought out ways to boost the current returns derived from their portfolios. But in recent weeks, this corner of the domestic energy market has been battered by a wave of risk aversion and general uncertainty related to the fiscal situation. That pullback has created an attractive entry point into an asset class that deserves a material allocation in any long-term portfolio.
MLPs possess two characteristics that are extremely rare in the current environment: relatively low volatility and relatively high dividend yields. The companies that make up MLPI -- which include Kinder Morgan and Enterprise Products -- stand to benefit from a push for job creation in the energy sector and an interest in high-yielding securities that will only intensify as low rates persist. Snap up the 6% dividend yield on this exchange-traded note (ETN) and pocket the handsome distributions in 2013.
Emerging Markets High-Yield Bond Fund (HYEM)
Most investors have beefed up their allocation to emerging markets stocks in recent years, embracing these securities as the primary drivers of global GDP growth in the "new normal" environment. But many have yet to pick up emerging markets exposure on the bond side of their portfolios; fixed income continues to be dominated by debt of U.S. issuers.
That creates a big opportunity to bolster yield while simultaneously reducing risk; debt of emerging market issuers offers substantial yields without exposing investors to significant credit risk. Many of the issuers in the HYEM portfolio face relatively high borrowing costs simply because they are headquartered in countries that are perceived to be risky bets. But these creditors generally maintain strong balance sheets and impressive cash flow profiles, making an interesting opportunity.
HYEM has a distribution yield of about 7%, a monumental payout ratio in the current environment.
iShares MSCI Canada Small Cap Index Fund (EWCS)
With developed markets around the world generally struggling to gain traction at present, those markets that possess certain "built-in" advantages can be smart buys. Canada has the good fortune of a natural resource abundance, being a major producer of everything from oil to gold. That gives our neighbors to the north the potential to thrive as demand for natural resources from the developing world remains strong in coming years. As the impact of a robust commodity market trickles down, other sectors in the Canadian market will benefit as well.
Canadian stocks struggled in 2012, lagging far behind their U.S. counterparts and posting year-to-date losses in many cases. Expect that situation to reverse itself in 2013 as commodity-intensive markets begin to grow at a faster rate than their not-so-fortunate peers. EWCS offers a unique way to play small cap Canadian stocks best positioned to benefit going forward.
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