"Assuming you want to invest a little more in the markets now, which ETF should be your first choice?" asks ETF expert Mark Salzinger, whose 'Best Buy' portfolios all strongly outperformed the markets last year.
In The Investors's ETF Report, he reveals his favorite picks from from two of his model portfolios -- a favorite for long-term wealth building and one investors still in their pre-retirement years.
"The credit turmoil of 2008 was unkind to most non-Treasury bonds, but none so much as high-yield bonds.
"iShares iBoxx $ High Yield Corporate Bond (NYSE: HYG) declined 17.6% in 2008, a rotten performance that would have been worse if not for a rebound of 22% off its November lows.
"Still, HYG is our favorite ETF for investors in the Wealth Builder Portfolio for three reasons. One, ields on these bonds (recently 15.8% for HYG) are near record highs relative to Treasuries of comparable maturities. High-yield bonds already discount widespread corporate failures.
"Two, part of President-elect Obama’s stimulus actions may be to directly support corporate credit with government money. In response, high-yield spreads relative to Treasuries have been falling in early January after spiking throughout November and early December.
"Three, in order to capture the double-digit return implied in HYG’s fat yield, investors don’t need price appreciation from the bonds or earnings growth from the issuers. They need only for those companies to stay in business, a historically low hurdle to achieve such a return.
"Our favorite ETF for those who follow the Pre-Retirement Portfolio is Vanguard Dividend Appreciation Index (NYSE: VIG).
"Vanguard and index provider Mergent are mum on exactly how they pick the stocks that go into VIG, revealing only that they look at companies with a long history of dividend-payout growth that are likely to continue to increase dividends in the future.
"However they build this portfolio, they have managed to stay away from nowstunted or eliminated dividends from financial stocks, opting instead for big weightings in healthcare and consumer-staples companies, two of 2008’s best-performing sectors. VIG lost only 26.7% in 2008, vs. 36.8% for the S&P500 Index.
"It is unlikely that consumer staples will continue to outperform as much this year after their resurgence in 2008. However, industrials, likely to gain from government stimulus spending, actually account for slightly more of the portfolio (14.6%) than consumer staples (13.9%).
"Energy stocks are a larger part of the portfolio now (10.8%) than they were at this time last year (9.7%), and with low valuations and strong resource values should perform better than in their 2008 collapse."
