Exchange-traded funds aren't just for passive investors who buy and hold. They're also for active investors, sly and bold.
But it's becoming a challenge to sort through the hundreds of ETFs trading on exchanges in the United States and Canada. What might help is ideas from top ETF investors and analysts.
Larry Berman: Short on stocks
Some experts expect a correction in stock markets later in 2010, for several reasons. First, the recovery in the world economy could be weaker than expected.
Second, inflation fears could surface and cause a jump in interest rates.
A market downturn is on the radar screen of Larry Berman, co-founder of Toronto-based ETF Capital Management and one of Canada's top ETF traders. "At some point in the second half of 2010 we should get a major market correction in the 20-per-cent or more range," he surmises.
A way to play this scenario, Mr. Berman says, is to buy the ProShares Short S&P 500 Fund and the iPath S&P 500 VIX Note, both trading on U.S. exchanges. The former rises if the S&P 500 falls; the latter rises if stock-market volatility rises (as occurs when the market tumbles).
There is also a gain to be had from holding assets priced in U.S. dollars, such as the above two.
That's because weak growth or higher interest rates should sink the Canadian dollar, too. Mr. Berman believes it will "drop back to 90 cents or perhaps a bit lower."
He cautions on the timing. "It is too early to add these positions ... but I expect they should be added when or if the S&P 500 gets to the 1,230-to-1,250 level in the first half of the year."
Ioulia Tretiakova: High-yield bonds
What if you are searching for yield? You might find the solution in a recommendation from Ioulia Tretiakova, director of quantitative strategies at Toronto-based PUR Investing Inc. Her firm specializes in constructing ETF portfolios.
She suggests the BMO High Yield U.S. Corporate Bond Hedged to CAD Index Fund. It has a yield-to-maturity close to 9 per cent and an annual management fee of 0.65 per cent.
"There are high-yield ETFs available from U.S. providers but they come with exposure to the U.S. dollar," Ms. Tretiakova says. The BMO High Yield offering is hedged to the Canadian dollar.
The elimination of currency volatility makes it "a viable option for Canadians with shorter time horizons and lower-risk tolerance." She notes: "Nobody would call high-yield bonds a low-risk investment, but they generally have lower volatility than equities."
Ms. Tretiakova further recommends diversifying with commodity ETFs, "which have the added benefit of inflation protection."
For broadly diversified exposure to commodities, the popular choices are PowerShares DB Commodity Index Tracking Fund and iShares S&P GSCI Commodity-Indexed Trust.
Donald Dony: Commodities and emerging markets
"Commodities are in a secular bull market, which is anticipated to continue for another six to eight years," says Donald Dony, the Victoria, B.C.-based editor of an advisory that dispenses ETF recommendations under the title Technical Speculator. Consider, then, the iShares CDN S&P/TSX Capped Materials Index Fund.
"Growing global demand for raw materials, particularly from Asia, is helping to fuel its long-term upward movement," Mr. Dony observes. "This ETF also had the strongest long-term performance during the last bull market from 2003 to 2008."
Another suggestion from him is the Claymore BRIC Fund, which tracks stocks in Brazil, Russia, India and China. "The top countries in the world in terms of GDP growth are not in North America or Europe but in the [emerging countries]"
The Dividend Guy blogger: Dividend stocks
Many investors follow the dividend approach to investing. They prefer owning shares in companies with good records for paying dividends. They also like that the dividend tax credit makes dividend income one of the least taxed sources of income in Canada.
However, the universe of Canadian dividend stocks is not very diversified. It tends to be concentrated in the financial and utility sectors. International exposure is thus important to ensure diversification. For this purpose, Jeremy, author of the Dividend Guy blog, prefers the WisdomTree International Large Cap Dividend ETF.
"WisdomTree takes a slightly different approach than a lot of dividend ETFs. Rather than just being market-cap weighted ... they base their index holdings on dividends, which of course I am a believer in," he explains. And it has a lower management expense ratio (0.48 per cent) compared with the average Canadian mutual fund (2.4 per cent).
"What I don't especially like is that the fund has had trouble keeping up with the MSCI EAFE index [a benchmark index tracking stock prices in Europe, Australasia and the Far East] However, it has performed better in down markets."