Three "Darn Good Reasons" for ETF Investors to Come Out of their Caves

You can fall in love with your wife, your children, your dog… even your New York Giants football team. But you should never fall in love with any of your investments.

I can’t say that any one person gave me this advice. I can say that I’ve adhered to its core message since the ‘87 crash. It has served me, my clients, my friends and my family members exceptionally well for 23 years.

In essence, the idea of taking a small loss to avoid a much larger loss is (and has always been) at the root of bear market avoidance. You held “long” positions in mutual funds or individual stocks, yet you sold to lock in profits and/or protect against extreme market risk to the downside.

After the severity of the price declines in 2008… after the shock of a housing collapse/credit crisis/Great Recession… some thinkers now believe in holding “short” positions for the long haul. They’re making the same mistake as bull market lovers made in the lazy, dot-com loving 90’s; that is, they’ve fallen head over heels in love by marrying themselves to specific investments. Only this time, they’re romancing the safest havens (e.g., treasury bonds, yen, gold, etc.) and/or the go-for-broke “Short Stock ETFs.”

I’ve got Gold (GLD) in client portfolios, but I’m not married to the position. Should precious metals fall significantly, I’ll take gains and move along. I’ve also got a wide range of Bond ETFs, but I’m not married to them either. When the Treasury Bond ETF bubble begins to leak, I will be moving elsewhere.

One of the biggest problems that I see is a “New Normal” tendency to become enamoured with doom-n-gloom. I sense that a few too many folks won’t know how to get out of the bear cave until it’s too too late.

Here are 3 reasons for ETF investors to fall OUT of love with the bear:

1.DEVELOPING WORLD GROWTH IS MAGNIFICENT. Sure, September/October may continue to spook. Yet a larger global growth story remains intact. Industrial metals like copper are in tremendous demand worldwide. Manufacturing in China is solid. Consumer spending is robust in Brazil. Best of all, country funds in Asia and Latin America are hitting 52-week highs, including but not limited to Malaysia (EWM), Indonesia (IDX), Thailand (THD), Chile (ECH), Peru (EPU) and Small-Cap Brazil (BRF).

2. CHANGE THAT INVESTORS CAN BELIEVE IN. Regardless of one’s opinion about the health care overhaul or the passage of financial reform, health care and financials are the only 2 sectors that experienced year-over-year investment losses (9/1/09-8/31/10). It follows that the biggest investment bang for one’s buck comes from government “gridlock.”

Republican gains in the chambers of Congress are highly probable. Moreover, the most potent combo for stock investors is a Democratic president with a Republican-controlled Congress in the 2nd half of a presidential term. Why is that? Businesses are more certain of their environment when government puts forward less legislation/less regulation.

3. ULTRA-LOW TREASURY YIELDS. Granted, the 10-year treasury jumped one full point (10 basis points) on the first trading day of September. It moved from 2.48% up to 2.58%. Yet the Federal Reserve will be buying U.S. treasuries to keep interest rate yields near lows.

Savers can’t earn money in CDs. Meanwhile, treasury bond investors need to hold on for 10 years to make 2.5%. Where’s the sense in that? Even the conservative SPDR Utilities Fund (XLU) yields north of 4.0%, and is likely to maintain its value over the course of an entire decade.

Similarly, the slightest stabilization of the economic picture will restore confidence in dividend-yielding dynamos like AT&T, Procter & Gamble, McDonalds and Kimberly Clark. Consider the SPDR S&P Dividend Fund (SDY) with an annual yield of 3.5%… again, a far better risk-reward scenario than a comparable 10-year treasury bond fund.

 

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