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TheStreet.com Ratings: Model ETF Portfolio

 

  • A growing economy needs power. Among the nearly 400 ETFs we monitor, the ML Utilities HLDR posted the second-best total return performance in February, second only to the PowerShares DB Oil Fund (DBO). The potential for more buyouts, as well as frequent dividend payouts, should provide good downside protection to this group.
  • A growing economy needs materials. We are switching into SPDR Materials (XLB) and out of KBW Capital Markets ETF (KCE). In addition to a list of brand-name defensive holdings such as DuPont(DD), Dow Chemical (DOW) and Alcoa(AA), the materials ETF sports a dividend yield of 4.2% which should translates into lower market volatility. The beta for XLB is 1.23 vs. a beta of 1.39 for the high-flying KCE.

The KBW Capital Markets ETF was the worst performer of the selections last month, down 7.3%. More-patient investors with higher risk tolerances should consider keeping the capital markets and brokerage ETF as a growth candidate, since the exchanges collect trading commissions whether stocks are rising or falling. But the risk here is that volumes may slow if indices drift downward.

Get income:

  • Keep your real estate income. Despite the strong run in these REITs, we are holding on to the Vanguard REIT ETF (VNQ), whose largest holding, Simon Property Group(SPG), was featured in TheStreet.com Ratings: Top Property Stocks. If you have this ETF, keep it. It pays dividends on a quarterly schedule and the March dividend is worth the wait.
  • Going more defensive with long-term dividend plays. We are swapping the iShares Morningstar Large Value (JKF) for the PowerShares Dividend Achievers Portfolio (PFM) in an attempt to limit the potential for future losses. This ETF invests in those companies that have increased their annual dividend for more than 10 consecutive fiscal years. The benefit of this is these are usually the last holdings to be sold by long-term investors. Top holdings include Exxon Mobil (XOM), General Electric (GE) and Citigroup(C).

Watch sectors closely:

  • Keeping the iShares S&P Global Telecom (IXP) worked well during the recent market selloff, and the fund provides good exposure to global telecommunications growth. About two-thirds of holdings are non-U.S. companies, including Vodafone(VOD) and Telefonica(TEF). This ETF also provides a modest 2.4% yield.
  • Stick with energy. Our portfolio invests in this sector through the iShares Dow Jones U.S. Energy(IYE).
  • Think defense. We're adding the PowerShares Aerospace & Defense (PPA) in place of the iShares Morningstar Small Core (JKJ).

But be more careful with sector funds in 2007. Whether you measure what has happened over the last two weeks through a sophisticated metric like the Volatility Index or just by looking at your lower balances on your monthly brokerage statement, it is painfully evident that 2007 will not be a repeat of 2006.

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Rudy Martin is the director of research for TheStreet.com Ratings. In keeping with TSC's Investment Policy, employees of TheStreet.com Ratings with access to pre-publication ratings data must pre-clear any potential trade through the legal department, and are prohibited from trading any security that is the subject of an unpublished rating revision until the second business day after the rating is published.

In keeping with TSC's Investment Policy, employees of TheStreet.com Ratings with access to pre-publication ratings data must pre-clear any potential trade through the legal department, and are prohibited from trading any security that is the subject of an unpublished rating revision until the second business day after the rating is published.

While Martin cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.

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