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3 ETF Areas With Total Return Potential in 2013

NEW YORK ( TheStreet) -- Why are investors still buying Treasuries and short-term investment grade bonds? Many have grown accustomed to the exceptional total returns.

As I look out across the 2013 landscape, however, I see less opportunity for investors to score big with a capital appreciation component on taxable U.S. debt or quality (e.g., AAA, AA, etc.) corporate debt. Depending on the bond duration, 1%-4% yields represent the total gain that one should expect here.

Of course, President Obama's reelection has secured the current Federal Reserve's mandate for a 0% interest rate target. High-yield corporates, preferred shares and convertibles with their 5%-7% yields should work just fine in our muddle-through economy.

These popular asset types are unlikely to see additional capital appreciation, though. More impressive total returns may need to come from another source.

Here are three ETF areas with enhanced total return potential in 2013:

1. Foreign REIT ETFs. While yields on domestic real estate investment trusts are better than comparable 10-year Treasuries, the 3.4% yield on Vanguard REIT (VNQ) is about the same as the yield for First Trust Morningstar Dividend Leader (FDL). Yet, the latter offers much greater total return potential.

On the other hand, REIT distributions have never been part of the beneficial tax rates on dividends. This implies that REIT yields may soon be on a level playing field with dividend stocks. If so, SPDR DJ International Real Estate (RWX), currently offering 3.8%, may have the power to lure investors over for the payout. Meanwhile, new investors would bolster the price that contributes to a handsome total return.

2. Timber ETFs. Homebuilder ETFs rocketed in 2012 based on the underlying belief that a housing recovery is sustainable. Yet, after a remarkable price run-up, homebuilder ETFs may have a lot less to offer for total return hunters. High dividends? You won't find them in this volatile sector.
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