"Big Joe" Clark has his wish list for 2009. And it includes some exchange-traded funds that even Santa Claus might find useful as stocking stuffers.
At the top are corporate bonds. In the coming year, the Anderson, Ind.-based advisor is expecting investment-grade corporates and high yield debt markets to perform like stocks do in more-normal times.
As a result, Clark is buying more of the iShares iBoxx Investment Grade Corporate Bond Index (NYSE: LQD) in client portfolios. It's a fund he held during the latter half of 2008.
At the same time, Clark is initiating new positions in the iShares iBoxx High Yield Corporate Bond Index (NYSE: HYG).
"Both are moving up in terms of prices," he said. "That means their yields are dropping some. But they're still yielding much better than Treasuries and very attractively priced."
The longer-term government bond market is at all-time lows in terms of yields, adds Clark. For example, the iShares Barclays 20+ Year Treasury Bond Index (NYSE: TLT) was paying interest of around 3.41% heading into Friday.
"Corporate bonds were sold off as an absolute sense of fear overtook the market. The economy is going to face continuing challenges in the coming year. But default rates aren't going to go over a cliff," said Clark.
So ETFs like LQD and HYG remain undervalued, despite a 20% rally in prices since the end of November, he says. "There are still legs on the corporate bond rally," said Clark. "The [yield] spread between Treasuries and investment-grade corporates has to go lower. Treasuries just can't go much lower."
Even though HYG falls into the junk bond category, he believes corporate balance sheets remain relatively healthy. And he points out that many companies issuing junk bonds are flush with cash on their books.
"When credit markets are this out of whack, yields are so low that companies can take debt off their books and refinance those bills at the lowest recorded rates in history," said Clark. "The reality is that opportunity exists to improve corporate balance sheets as long as Treasuries remain at relatively low rates."
Stock ETFs are another matter, he says. "These are very volatile times. The opportunity to get crunched still looms very large over the market moving into 2009," said Clark.
But he's optimistic about foreign ETFs. Clark has moved into the iShares FTSE/Xinhua China 25 Index (NYSE: FXI).
"It found some technical footing a few weeks ago. That makes us feel a little better about this ETF," said Clark.
His firm originally got out of FXI in November 2007 on concerns that China had overspent preparing for the 2008 Summer Olympics. "A number of bad things took place in that country in 2008, from earthquakes to a declining economy," said Clark.