This week's top ETF buys

China and oil present the latest opportunities in exchange-traded funds.

By MSNMoney partner Dec 7, 2010 1:44PM

Find hot ETFs © Digital Vision / Getty ImagesBy James Dlugosch

 

The Santa Claus rally took some time in coming, but investors are cheering its arrival. Stocks gained across the board last week, with the S&P 500 ($INX) gaining a fat 3%.

 

Our weekly top ETFs captured most of that gain, moving up 2.65%. That puts our little portfolio on track for an annualized return of more than 30%.

 

After 10 weeks, the evidence is clear: An absolute-return approach using exchange-traded funds produces substantial income without taking on nearly as much risk as pure trading or pure equity buying.

 

The market is giving us a gift as we turn our attention to next week. Concern over China reining in growth has pummeled that market in 2010. If you want big gains in 2011, I would most certainly keep an eye on China.

The relative weakness there creates opportunity, in my opinion. For next week, the SPDR S&P China (GXC) fund is the odds-on favorite to produce the biggest gains.

 

I'll make one small tweak to the top ETF buys for the week. We'll replace the leveraged retail ETF with the some exposure to oil. Oil is approaching $100 per barrel. It will not stop there.

 

Investors can expect one more week of gains before traders begin calling it a year. I would stay mostly long next week.

 

Here are my five top buys for the week:

 

SPDR S&P China (GXC): China stocks are cheap. If you are looking for big gains, you can find them with China. Don’t buy the fear of China slowing its economy. It is the numbers that matter, and valuations are still cheap relative to growth even if that growth is slowing.


PowerShares DB Oil (DBO): If you haven’t noticed, oil is back on the move. Next stop will be $100. In my opinion, the oil rally is just beginning, with the hiccup in offshore drilling due to last summer's British Petroleum spill in the Gulf of Mexico.

SPDR S&P Semiconductor (XSD): With one more week of real stock buying remaining in the calendar year, I want to keep the pedal to the metal with this selection of the semiconductor ETF. Electronic gear is still a hot buy. One concern going forward is the potential increase in silicon. Demand from the solar market may increase with higher oil prices, but that is not a concern for next week. Sit back and enjoy the rally here.

 

ProShares Russell 2000 (IWM): After next week we will ditch this position. The January effect is in full swing. After the middle of December, investors can expect the big boys to lock in profits for the year. They will sell the big winners that include smaller capitalized stocks. We have one more week of January-effect buying in December, and next week is it.

 

ProShares Short S&P 500 (SH): Last week's market move was impressive. It would be only natural to see some corrective selling. My guess is that momentum is strong enough for more buying. There is enough of the calendar remaining to keep stocks moving higher. If the selling comes early, the ProShares S&P short provides some protection.

 

I would buy an equal amount of each of these funds at the open Monday and sell at the close Friday.

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