McCall’s Call: Hot ETFs For A Double Dip

September 01, 2010

Matt McCall isn’t as worried as lot of other people that the
U.S.
economy is headed for a double-dip recession, but he’s got an investment plan just in case it does.

If you listen to the talking heads in the financial media, the odds of a double-dip recession are increasing by the minute. And if you hit the streets and ask the average investor, the odds increase even more.

Matthew D. McCallThat said, I felt it was only prudent to share my Double-Dip ETF Portfolio (DDP) that can help protect your portfolio in the event that the masses are correct.

But before I discuss the 10 ETFs in the DDP, I’d like to share my thoughts on the possibility of a double-dip recession. Contrary to the majority of investors and advisers, I feel the possibility of a double dip is quite low.

When the recession began in late 2007, the economy and stock market were at different stages than they are now. There’s also the fact that corporate profits are growing—granted at a slow-to-moderate pace, but they are growing even as consumers sit on their cash.

I also tend to take a contrarian view of the situation, and when the majority of investors are calling for a double dip, the likelihood of it actually occurring is minute. There are several other key factors behind my thought process, but that’s a story for a different article.

The Components

As I said, the DDP is composed of 10 ETFs with equal weighting (10 percent each), and the dividends are paid into the cash account.

ProShares Short S&P 500 ETF (NYSEArca: SH) seeks to return the daily inverse of the S&P 500 Index. For example, if the S&P 500 gains 1 percent on the day, ideally SH will lose 1 percent and vice versa. This ETF gives the DDP direct exposure to a falling stock market, helping investors benefit from lower prices.

Rydex CurrencyShares Japanese Yen ETF (NYSEArca: FXY) is designed to track the price of the Japanese yen. During recessions and bear markets in stocks, the yen has recently been the safe-haven currency. In 2008 when nearly every asset class was falling, FXY gained 22 percent and was one of the best investment options in the entire investment world. Regardless of the Bank of Japan’s efforts to curb the climb in the yen, if a double dip occurs,
Japan
’s currency will continue its rise.

Vanguard Intermediate-Term Bond ETF (NYSEArca: BIV) invests in bonds with maturities between five and 10 years with just over half backed by the
U.S.
government. The remainder of the bonds in the ETF are corporate bonds that are considered investment grade. The current yield is 4.0 percent and the expense ratio is only 0.12 percent. The risk with BIV is that a U.S. Treasury bubble occurs and the price of the ETF falls dramatically.

Market Vectors Double Short Euro ETN (NYSEArca: DRR) offers investors double the inverse of the euro versus the U.S. dollar on a daily basis. If the euro falls 1 percent versus the dollar, DRR will gain 2 percent and vice versa. DRR is the only leveraged product in the portfolio because over time the volatility will hurt the overall return. With the lack of a short euro ETF available, the next best was a leveraged short euro product. If the
U.S.
goes into a double-dip recession, the eurozone will follow and the ensuing drop will take a major toll on the euro.

SPDR Gold ETF (NYSEArca: GLD) has one objective, and that is to track the price of gold bullion, less the trust’s expenses. Over the years, during times of uncertainty gold has been an asset that investors flock to for safety. Add in the fact the metal is near an all-time high, there’s a small fear of inflation, and now the metal is considered a currency hedge. I think the probability of higher prices is good.

Market Vectors High-Yield Municipal Bond ETF (NYSEArca: HYD) is designed to track the high-yield segment of the municipal bond market, otherwise known as junk bonds. The ETF has 25 percent of its holdings in investment-grade bonds with the remainder in junk municipal bonds. This ETF happens to be one of my favorite bond ETFs due to the tax advantages, low volatility and high yield. The current SEC yield is 5.8 percent and an investor in the 35 percent tax bracket would receive a taxable equivalent yield of 9.0 percent.

United States Short Oil Fund (NYSEArca: DNO) inversely reflects the movements of the price of light sweet crude oil. As the price of oil falls, DNO should theoretically rise. A double dip will send the demand for oil down, and with supplies already at elevated levels, the price of oil will most certainly fall and the price of DNO will increase.

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