5 ETFs to own this week

Last week was a debacle, but corporate earnings are strong. Look for a recovery rally.

By Jamie Dlugosch Aug 1, 2011 9:48AM

Stocks are poised to rally this week as a resolution to the debt debate lifts investors' spirits.

 

While the attention was intensely focused on Washington, D.C., companies were busy reporting earnings. With 75% of those businesses reporting results beating Wall Street expectations, stocks are extremely undervalued.

 

It might pay to go against the crowd with respect to stocks this week.

 

Every once in a while, you get those weeks of trading that just need to be erased from memory. Last week was one. With the Dow down 4% and many more stocks down even further, the action made little sense.

 

Like many sell-offs, this one shall pass. In most cases, stocks will rebound quickly, replacing losses with gains. The ETF to own for strength is iShares S&P North America Technology and Multimedia Fund (IGN).

 

To be fair, stocks might have been spooked by weak economic data released last week. GDP growth is lower than expected, but such anemic growth can be explained by the disruption in Japan.

With that overhang evaporating, I would look for second- and third-quarter GDP to be stronger than expected. As such, stock prices are likely to gravitate higher.

 

With these ETF picks, I am striving for an absolute return. I want to minimize loss of capital while still generating a positive return. In 2011 the picks made here have generated a return of 5.3%. That number is solidly positive, with the added benefit of exceeding market returns by 340 basis points.

 

If I were in a risk-taking portfolio, I would most likely be more aggressive this week. I absolutely love being long stocks when everyone is selling.

 

As it stands, I have enough aggressiveness with the five picks below:

 

iShares Russell 2000 (IWM) – When markets collapse as they did last week small caps get caught in the vortex. The IWM lost more than 5% this week. There is really nothing more to say other than I expect a full recovery of those losses thanks to the strength of corporate earnings.

 

iShares S&P North America Technology and Multimedia Fund (IGN) – Technology shares took a beating last week. The IGN was down more than 8% last week. For those looking to be aggressive this is the place to be this week. If not for the absolute return focus of my picks here, I would want to use leverage to buy this sector. Even with out leverage this fund is likely to gain 10% in the next week or two.

 

SPDR Dow Jones Industrial Average (DIA) – With the Dow down more than 4%, large industrial companies are even cheaper than they were previously. There is great value in this group of stocks. In many cases you get paid a dividend in addition to obtaining double digit earnings growth. I’ll stick with the Dow this week looking for a rebound.

 

SPDR S&P Homebuilders (XHB) – Fear was particularly great in the homebuilding market last week. If the US failed to raise the debt limit or worse, default on its debt interest rates would have zoomed higher. Higher interest rates would likely squash the little demand for new homes. The XHB fell more than 5% as a result of that fearful speculation. With that issue resolved this fund should quickly recover.

 

SPDR S&P 500 (SPY) – I want to stay long with the last pick here, but I don’t want to take excessive risk. Market risk is all we need given the above selections. Investors can get market risk by owning the broad basket of stocks in the S&P 500. The SPY lost 4% last week. Expect better this week.

 

Keep an equal weight in the five picks above.

 

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