by Lawrence Meyers | December 20, 2012 6:45 am
As we roll into the new year, investors with a very long-term time horizon should stick with what works — namely, diversify, diversify, diversify. Holding a diversified portfolio is a time-honored, tried-and-true way to achieve returns while keeping risk at a manageable distance.
One of the easiest ways to do that is to allocate a portion of your portfolio to exchange-traded funds — the kings of diversity, allowing you to bundle numerous stocks or leverage other assets into one tradable vehicle.
So with an eye on funds that could see outsized returns in the next year or more, here’s a look at five recession-proof ETFs investors should buy for 2013:
I believe the country is headed for recession in 2013. However, there are certain products Americans are always going to buy because they must buy them to meet minimum living requirements.
Consequently, you’ll want to own a consumer staples ETF.
There are numerous consumer staples funds, but the one I think is probably balanced the best is PowerShares Dynamic Food & Beverage ETF (NYSE:PBJ), which holds 30 stocks weighted in a small range, from 5.08% (Kraft Foods, NASDAQ:KRFT) to 2.59% (Dean Foods, NYSE:DF). Other top 10 holdings include Coca-Cola (NYSE:KO) and Hershey (NYSE:HSY).
One product that American will always use — even when it’s stupid expensive — is fuel. So you’ll want to have an energy ETF in there, and there are many choices in that category as well.
I suggest focusing on those energy producers and explorers, so the iShares Dow Jones U.S. Energy Sector Index Fund (NYSE:IYE) is my choice here. This contains a number of sturdy (though not overly generous) dividend payers, including Exxon Mobil (NYSE:XOM) and Schlumberger (NYSE:SLB).
Bonds continue to be a terrible place to put money, and that’s not going to change in 2013. With yields practically nonexistent, inflation creeping up on us while not being reported on, and income-producing securities facing questions with the fiscal cliff, you want to be in preferred stocks.
The iShares S&P U.S. Preferred Stock Index (NYSE:PFF) yields 5.75% as of now, and contains preferred shares for many companies that are in solid financial shape. Since common dividends get suspended before preferreds do, you’ll have ample notice if anything untoward happens regarding any given preferred stock selection.
With an ETF, you are also protected because of the diversification. This ETF holds preferreds in top banks like Bank of America (NYSE:BAC) and Wells Fargo (NYSE:WFC), but also has holdings in telecom and real estate.
When there’s a recession on, and with inflation, you want to be in real estate. This hard asset is the best thing you can hold for the long-term in any event, but especially given the economic conditions we’re facing.
I like the Vanguard REIT ETF (NYSE:VNQ) because it aims to mirror the MSCI US REIT Index, which itself represents about 85% of all U.S. REITs.
The fund has a tiny expense ratio and a healthy yield — a great combination — and VNQ’s top 10 holdings make up about half of the portfolio, which is good because those top 10 holdings are the most solid REITs the market has to offer. These include some of my favorites like Public Storage (NYSE:PSA) and Equity Residential (NYSE:EQR).
Also included in a list of must-owns during bad economic times are precious metals. As it happens, some believe the commodity cycle is in its earliest phases, so that’s all the more reason to jump into this sector. Plus, they’ll provide that inflation hedge against the Fed’s continued foolishness centered around quantitative easing.
It’s difficult to find an ETF that isn’t heavily weighted in gold — not that I mind, but I prefer greater diversification. I would prefer you go with ETFS Physical PM Basket Shares (NYSE:GLTR), as platinum and palladium make up about 13% of the portfolio, silver takes up 37% and gold leads with 50%.
As of this writing, Lawrence Meyers was long PFF. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.
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