More than three-quarters of all ETFs are sitting in negative year-to-date territory as we approach the end of the second quarter, leaving investors wondering whether there's hope for the rest of the year.
The financials, oil, the dollar and commodities have been among the dominating themes in the first half of 2008, and the challenge is to figure out what trends will dominate in the latter half.
Tom Lydon, president and portfolio manager for California-based
sees the dollar gaining momentum over the next six months. One of his top picks among ETF names is the
PowerShares DB U.S. Dollar Bullish Fund
"The Treasury and the
have sent signals that they want a stronger dollar, and they're ready to defend it," he says. "The U.S. hasn't intervened in the currency markets since 2000, and Bush has preferred to let market forces do their work. But this trend seems to be changing."
Lydon notes that the FOMC might not bail the dollar out right away, but rather take a wait-and-see approach.
"The Fed might raise interest rates to boost the dollar, but it might not be immediate -- keeping rates steady for now is important for the economy's recovery," he says. "The dollar is at its strongest point in three months now."
Lydon also likes China, and thinks that homebuilding is a sector to keep an eye on. With top holdings such as
iShares FTSE/Xinhua China 25 Index
is his other top pick for the second half.
"Despite falling off sharply this year, China is still a contender and they are still growing," he says. "While other capitals have suffered a post-Olympic Games hangover, China may not, because Beijing accounts for only 3.7% of the country's GDP, and Olympics-related capital spending was only 1% of nationwide investment from 2003-2007."
As for homebuilder ETFs such as the
iShares Dow Jones U.S. Home Construction Fund
, he says. "It's too soon to bottom-fish, but keep an eye on this area."
Energy Heats Up
David Vomund, president and founder of
, also sees interest rates going higher. This sentiment makes the
UltraShort Lehman 20+ Treasury ProShares Fund
one of his top picks for the second-half of 2008.
"The inflationary picture is bearish for bond prices," he says. "After being in an uptrend, long-term bond ETFs moved sideways for six months and very recently broke below the consolidation. Those that hold U.S. Treasury ETFs will be disappointed as they see prices fall."
Vomund's other top pick banks on continued strength in the energy space. He likes the
iShares Dow Jones U.S. Oil & Gas Exploration & Production Index Fund
, which has
( XTO) among its top holdings.
"While many point to excessive profits from oil companies, the weak dollar, speculation and high oil demand, the important story is on the supply side and the role of the existing oil field decline rate," he says. Oil at $100 a barrel "is not an anomaly, but is the result of fixed supply and increasing demand."
The Three Bears
Arthur Hill, editor and publisher of
, thinks that the market could be in for some tough sledding in the second-half of 2008. His top three ETF picks for the next six months are bets on problems ahead.
His top pick is the
UltraShort Financials ProShares Fund
. The fund's aim is to return investors twice the inverse of the daily performance of the Dow Jones U.S. Financials index, which includes names such as
Bank of America
J.P. Morgan Chase
"I think the financial problems are going to continue," he says. "This ETF has demonstrated a lot of support around the $90 to $100 range. I think it can go above its March high."
The other two bearish funds that Hill likes over the next two quarters are the
UltraShort Consumer Services ProShares Fund
Short Dow30 ProShares Fund
The consumer-services index includes
among its top components.
"The sector got some hope with the economic stimulus package, but it might only prove to be like an afternoon caffeine shot," Hill says. "This fund has shown a lot of support around $80 to $85 and I think it is heading above $110 to $115."
As for his Short Dow30 call, Hill again points to the troubled credit markets. "The Dow contains six financial stocks" out of 30 companies total, he points out. "It's poised to go below its March lows."
Hill acknowledges that these funds aren't for the faint of heart.
"There is a lot of risk involved with these funds," he said. "The Fed could still throw money at the market to try to stimulate the financials. If you are going to go with one of these funds, pick a profit target and stick to it. Don't get greedy on the short side."
At the time of publication, Billy Fisher was long SKF and SCC. He was short BAC.