Gearing up to invest in 2009 is like driving in a tropical storm: vision is severely limited and there's no way of knowing what conditions will be like a mile ahead. The going could be twice as bad or, then again, it just might turn out to be quite sunny and pleasant. In the current discouraging economic environment, "going to the mattresses" of low-yielding money market funds or even certificates of deposit might sound appealing. But many economists are forecasting a resumption of growth in the second half of 2009, and equity markets are famous for anticipating expansions six to 12 months before the fact. Because the biggest gains are frequently made in the incipient stages of bull markets, an argument exists for maintaining some equity exposure. TheStreet.com Ratings searched for exchange-traded funds appropriate for surviving the many financial crosscurrents that are complicating the current investment milieu. After scrutinizing the 800-plus ETFs in our database, we selected the nine funds in the accompanying table as ones we believe are worth considering for '09. With continuing aftershocks of the credit crunch a distinct possibility and a lingering global recession a virtual certainty, the dual blessings of a healthy dividend yield combined with the backing of the U.S. Treasury would make a Treasury bond fund a solid choice for these treacherous times.
But a growing chorus of pundits is expressing fear that the gargantuan injections of money to stimulate the economy will ultimately result in persistent inflation, which will likely result in higher interest rates and lower quotes for bonds. That makes an inflation-protected Treasury bond fund like the iShares Lehman TIPS Bond ( TIP) a conservative, sensible fixed-income vehicle.
For equity exposure, a conservative strategy is to stick with investments in areas where consumers are most likely to continue to patronize, even during an economic slump. With investments in strong companies dealing in food and basics, a logical choice is the Consumer Staples Select SPDR ( XLP). Its major holdings include old-line standby firms such as Proctor & Gamble ( PG), Wal-Mart ( WMT) and Kraft Foods ( KFT). As with the other funds in the "Income & Safety" section of the accompanying table, XLP's current payout rate of more than 3% exceeds the yield to maturity of a typical triple-A corporate bond. One area where consumers are likely not to skimp is in health care. The promise of a boost in health-care spending by the incoming administration, in addition to expansion of the worldwide middle class, makes iShares S&P Global Healthcare ( IXJ) an ETF worth considering. It is 64% invested in the U.S. with 12% of its holdings in Swiss investments and 9% in the U.K. Its major holdings include Johnson & Johnson ( JNJ), Pfizer ( PFE), Abbott Labs ( ABT) and Merck ( MRK). IXJ is also likely to benefit from the actuarial reality of an aging Baby Boom generation as well as advances in medical technology and pharmacology. Besides being least likely to be driven out of business in a recession, many utilities will benefit from the slump in energy prices as well as the retreat in interest rates. Vanguard Utilities ETF ( VPU), with a yield in the 4% range, holds major positions in Exelon ( EXC), Southern Co. ( SO), Dominion Resources ( D) and Duke Energy ( DUK).
Telecommunications is, arguably, closely akin to a utility industry. Anyone who has ever tried to pry a cell phone away from a teenager's ear will confirm that it is likely to take more than a severe recession to temper telecom usage. So with worldwide wireless voice communications and text messaging unlikely to slacken much, even in an economic slowdown, the iShares S&P Global Telecom ( IXP) makes sense as an ETF choice for 2009. Geographically well diversified, the fund is 29% invested in U.S. securities, 13% in the U.K., 10% in Spain, 6% each in Japan and Mexico and 5% in Canada. IXP's major holdings include AT&T ( T), Vodafone ( VOD), Telefonica SA ( TEF) and Verizon ( VZ). The five ETFs in the "Income & Safety" section of the accompanying table are all graded in the "A" and "B" ranges by TheStreet.com Ratings, making each a buy-recommended fund. With the continued rapid expansion of the ETF population, the remaining funds on the list are from the classes of 2007 and 2008, not having sufficient performance histories to receive marks from TheStreet.com Ratings. Incoming president Barack Obama is promising huge economic stimulus expenditures in addition to the sums already committed to battling the slump. He continues to promote an alternative-energy program, which could potentially turn around the investments held by iShares S&P Global Clean Energy Industry ( ICLN). Most alt-energy ETFs focus on one aspect of the effort, such as wind, solar, biofuels or nuclear energy. But ICLN is well-diversified across several of these fields. It will be some time before alternative energy generates sufficient profits to put that sector in the same league with the petroleum industry. But it seems as if some cadre of investors are keeping the faith, as alt-energy funds regularly pop up unexpectedly on lists of top-performing ETFs. The performance of youthful ICLN has thus far not been sufficient to draw much positive attention.
ICLN's portfolio includes large positions in First Solar ( FSLR), Covanta Holdings ( CVA) and Energy Conversion Devices ( ENER). The fund is well-diversified geographically, with significant holdings in the U.S., Brazil, Spain, China and Germany. Infrastructure expansion and improvement is also likely to be among the stimulus expenditures in the U.S. and elsewhere. The iShares S&P Global Infrastructure Index ( IGF) is a potential beneficiary. Besides being 28% invested in the U.S., its holdings are spread across Germany, Canada, France, Spain, Australia, Japan, the U.K. and China. Infrastructure development requires basic materials such as metals and chemicals. Assuming that stimulus programs are ultimately successful in igniting an economic recovery, a resurgence of demand for industrial materials should result. Add to all that the possibility of an inflationary reverberation from the Federal Reserve's massive monetary stimulus and it make sense to consider the SPDR S&P International Materials ETF ( IRV). Geographically, IRV's holdings are 19% in U.K. investments, 16% each in Canada and Australia, 15% in Japan and 8% in Germany. Its major positions include BHP Billiton ( BHP), Rio Tinto ( RTP) and Anglo American ( AAL). Finally, someone not interested in second guessing government and central bank strategists might just want an ETF that is as widely diversified as possible -- one that gets a piece of the action no matter what sector gets hot or where, geographically, advances might happen. Well, if that's the case, the venerable Vanguard Group has something for you! It offers undeniably the most diversified ETF possible: by sector, investment style, industry, country, geographic region, growth prospects, you name it. The Vanguard Total World Stock ETF ( VT) starts with portfolio holdings in blue chip stocks such as ExxonMobil ( XOM), General Electric ( GE), Microsoft ( MSFT) and AT&T ( T). But it goes on and on, more than 2,100 stocks of companies located in 47 countries, including both developed and emerging markets around the world. The fund employs a sampling strategy to replicate the performance of the FTSE All-World Index, a free float adjusted, market-capitalization-weighted index of nearly 3,000 stocks designed to measure the market performance of large- and mid-cap stocks of companies located across the globe. Gaming the moves of governments in their efforts to battle the global downturn is challenging and potentially profitable. But years from now, it shouldn't be surprising if a few second-guessers don't watch in amazement as an intelligently mixed portfolio of the VT "everything" ETF and the conservative TIPS U.S. Treasury ETF climbs steadily past their investment choices in the performance derby.
Investors who aren't sure whether they should opt for ETFs rather than traditional open-end mutual funds will find some guidance in How to choose Between an ETF and a Mutual Fund.