McCall’s Call: Build A Nest Egg In A Storm

August 11, 2011

It's a great time to think about the long term when the market’s in disarray.

The market has hit the “reset” button over the last month and is now officially in correction mode after the first downgrade of U.S. debt in history. The somewhat expected downgrade S&P last Friday sent world markets to new 2011 lows and well off the multi-year highs set earlier this year.

Matthew D. McCallThe sudden and dramatic selloff in nearly every asset class, except Treasurys, might be the start of a new bear market or the best buying opportunity of the year. I tend to lean towards the latter, and therefore feel it’s appropriate to look at ETFs that could be used to build a portfolio.

I’ll assume for the purpose of this discussion that an investor is new to the market, so the goal is to build an all-ETF portfolio from the ground up. And what better time to do this than after stocks have fallen more than 10 percent from their recent highs. So, I’ll highlight the 10 ETFs I think are now cheap and good long-term investments.

Sector ETFs

Some parts of the economy are going to do better than others, and luckily for ETF investors there are easy ways to gain exposure to those trending or dependable areas, such as healthcare.

  • Take the iShares Dow Jones U.S. Pharmaceuticals ETF (NYSEArca: IHE). It’s composed of 39 U.S. drug stocks, with a heavy concentration on the large-cap sector. The top 10 holdings make up about 58 percent of the entire ETF, with Johnson & Johnson (NYSE: JNJ) and Pfizer (NYSE: PFE) the top two holdings. IHE’s nearly 20 percent pullback in a month from an all-time high has created an attractive entry level for long-term investors. It has a 0.47 percent annual expense ratio and a dividend yield of 1.3 percent.
  • The SPDRs Select Sector Utilities ETF (NYSEArca: XLU) is a dividend play too, but it’s also an ETF that should outperform the market during times of extreme volatility and selling. It is made up of 35 utility stocks, mainly electric utilities that are based in the U.S. Its low expense ratio of 0.20 percent and an above average dividend yield of 4.4 percent make the ETF even more compelling to long-term investors. And, more to the point, while XLU recently hit a fresh 52-week low, it has held up better than many of its peers.
  • The First Trust ISE Cloud Computing ETF (NYSEArca: SKYY), launched in July, is a newcomer to the world of tech ETFs. It is made up of 40 stocks that are either directly involved in the cloud computing business or have indirect ties to this information-technology niche. While SKYY has experienced a rough first month given all the selling, I think this sector is likely to produce many of the next great technology stocks. Buying into the current weakness and building a position is my recommendation. The ETF has an expense ratio of 0.60 percent.
  • Oil is another area worth looking at closely. I like the IQ Global Oil Small Cap ETF (NYSEArca: IOIL), the first and only ETF to concentrate solely on small-cap names within the energy sector. The ETF began trading in May of this year and has taken a big hit recently due to the drop in the price of oil. That makes it attractive. With 64 stocks and less than 50 percent of them in the U.S., the ETF offers diversity for those investing in the oil industry. I chose IOIL as a way to access the energy sector because, historically, small-cap energy stocks have tracked the price of oil most closely. I think $80 per barrel oil is a bargain, and my firm is recommending IOIL as the way to play rising oil prices. The expense ratio is 0.75 percent.

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