Publish date:

Top 3 ETFs For the Rest of 2010

The market isn't likely to move up in a straight line for the rest of 2010, but there are some ETFs that ought to do well based on improving trends and fundamentals.
Author:

NEW YORK (TheStreet) -- This has been an interesting year so far, with two big market corrections in January and May.

I doubt the market will move up in a straight line for the rest of 2010, but there are some ETFs that ought to do well based on improving trends and fundamentals.

My first pick for the rest of 2010 is gold. I have held gold and gold miners at different times since 2004 and I've held

iShares Comex Gold

(IAU) - Get iShares Gold Trust Report

continuously since January 2008.

I also hold IAU and

Market Vectors Gold Miners

(GDX) - Get VanEck Vectors Gold Miners ETF Report

in my ETF Action Newsletter, and the allocation in gold is a big part of why this portfolio is beating the

S&P 500

this year.

Gold has a very good long-term story that is just becoming popular. Long shunned by investors in the West, it is finally regaining status as an asset. It doesn't seem to matter if the economy gets stronger or weaker. Whether it is sovereign debt creating investor fear about the value of currencies or whether it is growing demand from China and India, gold appears to find buyers.

Lately, the gold miners have been following the price of gold and that has meant gold miners have been an outperformer relative to the stock market. This isn't always the case. In the past, gold miners have sometimes followed the stock market lower and that's a big reason why GDX has yet to exceed its March 2008 all-time high, whereas

SPDR Gold Shares

(GLD) - Get SPDR Gold Trust Report

is up 20% since then.

After gold, the China story is getting more interesting and I continue to see good things from China. Whereas the U.S. and Europe are worried about deficits and slow growth, China is worried about inflation and housing bubbles, problems to be sure, but signs of growth. On top of that, the Chinese yuan will begin, once again, to fluctuate against the U.S. dollar.

Claymore/AlphaShares China Small Cap

(HAO) - Get Invesco China Small Cap ETF Report

was my pick as the best China ETF for 2010, and it's still my choice. This fund has low exposure to financials, a sector that needs to raise a lot of capital, and higher exposure to consumer sectors.

One of the big news stories out of China, besides the change to the currency, has been strikes at several factories. Workers are demanding higher wages, and in many cases, receiving them. This is good news for the consumer sector and should help China balance its economic growth.

HAO has lagged over the past three months and it's down 4% this year, offering a good entry point for investors.

My third pick for the second half of the year is natural gas. The BP oil spill has led Congress and the White House to take another look at energy reform, a popular idea that never amounts to anything.

TheStreet Recommends

Natural gas has a lot of factors working in its favor. It's cheap, which is always good. The U.S. has massive supplies of it, which means Americans will be put to work to produce it and the money will stay in the U.S. Natural gas also emits less carbon than oil and coal, so it's a bit cleaner if the government is looking to reduce carbon. It's also efficient relative to other "greener" technologies. As one famous Spanish study showed, the creation of one green job in alternative energy actually caused the loss of 2.2 other jobs.

All those factors are one big reason why natural gas is called a bridge fuel, one that can fill America's growing need for energy until alternatives become competitive. Whether Washington includes it as part of a reform package is another question.

Even without some help from the politicians, natural gas may do well after prices appear to have bottomed. The fuel tumbled along with almost every other commodity in 2008 and early 2009, but unlike crude oil, which rallied about 100% from its lows, natural gas kept on falling until September 2009, when it rallied to finish the year where it started.

Natural gas then proceeded to fall again in 2010, but it moved sideways in April and May, before rallying this month. Prices may not take off from here, but it's a good sign for the industry.

I don't like

U.S. Natural Gas

(UNG) - Get United States Natural Gas Fund LP Report

as a play here. Although natural gas bounced from September 2009 to the end of the year, UNG kept falling during this period due to contango.

Instead, investors should go with

First Trust ISE-Revere Natural Gas

(FCG) - Get First Trust Natural Gas ETF Report

, which owns exploration and production firms -- and they won't be alone in buying these companies.

Private equity and sovereign wealth funds, many from Asia, have recently bought into producer

Chesapeake

(CHK) - Get Chesapeake Energy Corporation Report

. The company sold $1.7 billion of convertible preferred stock in May and another $900 million in preferred stock in June.

For income oriented investors, the

J.P. Morgan Alerian MLP Index ETN

(AMJ) - Get J.P. Morgan Alerian MLP Index ETN Report

offers some exposure to companies that profit from transporting and storing natural gas. The firms should do well if natural gas volumes increase. Since it's an ETN, it carries with it credit risk, but the shares have performed well recently and still offer an attractive yield of about 5.8%.

At the time of publication, Dion Money Management owned IAU and GDX

Don Dion is president and founder of

Dion Money Management

, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.