by Tom Taulli | September 19, 2012 7:30 am
Last week, the Federal Reserve launched the third round of quantitative easing, which will involve at least $40 billion in monthly purchases of mortgage-backed bonds.
The hope: to help spur economic activity and cure America’s unemployment ills.
But the Fed’s efforts understandably will impact a variety of investments as well across a number of asset classes. But rather than trying to pick and choose the right stocks, a better strategy might be broader plays made through mutual funds and exchange-traded funds.
Here are five to consider:
Quantitative easing essentially is a way to get investors to move money away from bonds to riskier assets, which should help make it cheaper for companies to borrow money and grow. But the shift in appetite is likely to be subtle — investors probably will move into assets that have only modestly higher risk profiles.
A good example of this is utilities, which traditionally are as steady as stocks get. They usually have strong cash flows and (most importantly) hefty dividend yields.
A top ETF is the Utilities Select Sector SPDR (NYSE:XLU) fund, which has more than $6 billion in assets. It tracks the 32 utilities in the S&P 500 Index, including names like Duke Energy (NYSE:DUK), Exelon (NYSE:EXC) and Dominion Resources (NYSE:D).
XLU has a rock-bottom expense ratio of 0.18%, which means more money gets back into investors’ pockets — and you’ll want as much as XLU’s 3.8% in dividends as you can get.
However, like utility stocks, you’re not looking for breakneck growth from XLU. The fund is meeting expectations there, essentially flat year-to-date amid profit-taking and slow revenue growth on the back of a sluggish U.S. economy. Still, the XLU has seen 10% annual returns the past 10 years — but really, even if the XLU stays flat, it’ll serve its purpose as a solid income play.
As InvestorPlace’s Chris Johnson noted in a recent post, real estate investment trusts also should benefit nicely from QE3. That industry is highly sensitive to changes in interest rates; and real estate looks on the road to recovery as is.
One fund to look at here is Cohen & Steers Realty Shares (MUTF:CSRSX), which manages $4.9 billion in assets.
The portfolio managers, which include Martin Cohen and Robert Steers, started the fund 21 years ago. The duo have a disciplined focus on finding values, but also make sure their REITs have strong rent potential. Some top holdings include Simon Property Group (NYSE:SPG), Vornado Realty Trust (NYSE:VNO) and Public Storage (NYSE:PSA).
Returns have been solid during their tenure, with an average annual gain of 10% in the past 15 years. That performance has earned a four-star Morningstar rating, and comes at a reasonable 0.96% in expenses … though the minimum investment is a sizable $10,000.
The ushering in of QE3 also should result in a drop in the value of the U.S dollar. As a result, gold — traditionally considered a hedge against inflation — should get a lift. It also should get traction as an alternative to the U.S. dollar as central banks start using gold as part of their reserves.
An effective and simple way to benefit from the rise in gold is the SPDR Gold Shares (NYSE:GLD) exchange-traded fund.
The GLD is backed by physical gold stored in vaults in London. The fund is highly liquid — averaging daily volume of about 7.1 million units — which means investors enjoy tight bid/ask spreads. GLD also has a cheap expense ratio of 0.4%.
GLD has gained about 12% year-to-date, with most of that coming in anticipation of/after QE3.
Interest rates are likely to remain at rock-bottom levels for the next couple years. No doubt, this is good news for financial institutions. In fact, as the economy starts to rebound, these firms should see strong profits as loan volume increases for things like real estate and businesses.
A mutual fund to consider for tackling this angle is Davis Financial (MUTF:RPFGX). RPFGX is managed by Kenneth Feinberg, one of the industry’s top money managers in the financial sector. While Davis Financial has averaged just 6% in the past 10 years — unsurprisingly, the RPFGX was crushed by the financial crisis — the fund is up a market-beating 17% year-to-date.
Some of Davis Financial’s top holdings include American Express (NYSE:AXP), Wells Fargo (NYSE:WFC) and Bank of New York Mellon (NYSE:BK).
Feinberg looks for value opportunities and is willing to hold onto stocks for the long haul, translating into a sparse 12% turnover ratio, which helps bolster returns. Its 0.91% expense ratio also is reasonable, and the fund has earned a four-star rating from Morningstar.
Lastly, crude oil should get a boost from QE3. Besides the theoretical help from an improved economy, it should gain a currency lift similar to gold. Crude oil is denominated in U.S. dollars on global markets, so when the currency falls in value, the price of the commodity often increases.
There are many energy funds to choose from, but one standout option is Vanguard Energy Fund Investor Shares (MUTF:VGENX), which oversees $12 billion in assets. The fund’s portfolio manager is Karl Bandtel, who has been in charge for the past two decades.
Bandtel takes a conservative approach, which means investing in large-cap stocks; so naturally, VGENX’s top holdings include energy titans like Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX) and BP (NYSE:BP). The fund has gained 9% this year; well behind the average of 16% it has logged annually over the past 10 years.
As is customary with Vanguard funds, the VGENX has a fairly low expense ratio, this one coming to 0.34%. It also garners Morningstar’s highest rating of five stars.
Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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