ETFs Poised for a Possible 'Pop'

If the worst is behind the markets, some ETFs may be in line for some strong moves higher.
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In any significant market downturn, smart investors will be looking to get well-positioned to capture upward movements during the recovery.

It is subject to debate whether the market's recent progress is a sign that the worst is behind us. If it does turn out that we're entering a period of a strong market recovery, there are some areas in which it may be smart to have some money.

"Those that have been the most depressed" are the best areas in which to be invested, says Mark Luschini, chief investment strategist for Janney Montgomery Scott.

Two areas that Luschini believes have good upside potential if the market is to see a prolonged recovery are financials and consumer discretionary.

ETF investors looking to position themselves in these areas have several options. On the financials front, there are funds to consider such as the

Financial Select Sector SPDR

(XLF) - Get Report

, the

Vanguard Financials ETF

(VFH) - Get Report

and the

iShares Dow Jones U.S. Financial Sector

(IYF) - Get Report

.

These funds each have dividend yields between 3% and 4% and have top holdings such as

Bank of America

(BAC) - Get Report

,

JPMorgan Chase

(JPM) - Get Report

and

American International Group

(AIG) - Get Report

.

As for consumer-discretionary ETFs, investors could look to the

Vanguard Consumer Discretionary ETF

(VCR) - Get Report

, the

PowerShares Consumer Discretionary Fund

(PEZ) - Get Report

or the

Consumer Discretionary SPDR

(XLY) - Get Report

.

These funds have top holdings such as

McDonalds

(MCD) - Get Report

,

Nike

(NKE) - Get Report

and

Walt Disney

(DIS) - Get Report

.

Joe Battipaglia, market strategist at Stifel Nicolaus, agrees with Luschini on the upside potential for financials.

"If we were to come out of a recession, financials would obviously be a big performer because they have been so beaten up," he said. "I also think two other areas that would do well are REITs and high-yield bonds because of their spreads relative to Treasuries."

To get into high-yield bond ETFs, investors might find it worth their while to check out the

SPDR Lehman High Yield Bond ETF

(JNK) - Get Report

, the

iShares iBoxx High Yield Corporate Bond Fund

(HYG) - Get Report

or the

PowerShares High Yield Corporate Bond Fund

(PHB) - Get Report

.

And for REIT ETFs there is the

Vanguard REIT Index ETF

(VNQ) - Get Report

and the

DJ Wilshire REIT ETF

(RWR) - Get Report

, which both have dividend yields of approximately 5%.

Greg Dahlman, senior vice president and portfolio manager for Dana Investment Advisors, is focusing on sectors that have the potential to outperform their earnings estimates.

"The big story is where the estimates are going," he said. "If you underpromise and overdeliver, your stock is going to be rewarded. Being in sectors and stocks that don't revise downwards and don't surprise to the downside is key."

Although bullish conditions are generally welcomed by investors, there are always going to be sectors that will fall victim to underperformance. Avoiding these areas is vital to building a winning portfolio.

"You want to keep in mind not only where you are putting your money, but also where it is coming out of," Luschini says.

Health care, a sector that has been historically considered to be defensive in nature, is one area of the market that Luschini thinks could be susceptible to outflows of money if the market continues to gain steam.

Should this trend materialize, it could make for a rocky road for ETFs in the health-care space such as the

Health Care Select SPDR

(XLV) - Get Report

and the

Vanguard Health Care ETF

(VHT) - Get Report

.

These funds have only recently begun to move off of their 52-week lows. They contain names such as

Johnson & Johnson

(JNJ) - Get Report

,

Pfizer

(PFE) - Get Report

and

UnitedHealth Group

(UNH) - Get Report

.

And what if the U.S. dollar begins to rebound at some point?

Luschini points out that such a movement could prove to be problematic for portfolios that are heavily concentrated with international exposure.

"You would want to reconsider multinational corporation-themed ETFs and foreign-themed ETFs," he said.