We have witnessed a massive rebound in the stock market, with exchange traded funds such as the S&P 500 SPDR , iShares Russell 2000 ETF and the Russell 3000 ETF registering increases of as much as 60 per cent from the year's low in March. If the past is any indication, with the economy as a guide, we should expect a much tamer showing next year.
Broad-based index funds may not produce such stellar gains, so investors may need to select individual foreign countries, certain sectors or themes. The debate as to whether the U.S. stock-market rally is justified leaves me wanting to find countries that are on firmer economic footing. Chile has proven itself as an attractive investment destination for having bottomed six months before the S&P 500. It had a much smaller decline and is now within a few percentage points of its all-time high. Copper exports contributed to the outperformance. China is the big source of copper demand.
Copper is a leading indicator of economic activity. If the global economy continues to recover in 2010, copper and anyone in the copper business, like Chile, stands to do well. Vietnam, Pakistan and India also will need more copper as quality of life and services improve.
The iShares Chile Investable Market Index Fund is a simple way to access that theme. The fund has 34 holdings, charges a 0.63 per cent fee and is heaviest in the utilities, materials and industrial sectors.
The next idea is likely to be either a homerun or a triple play. The PowerShares Global Coal Portfolio is a well-constructed ETF that provides access to coal companies and several foreign countries. When the price of crude oil imploded last fall, the PowerShares Global Coal Portfolio tumbled 60 per cent. The ETF is up 140 per cent from its low as crude has more than doubled.
The fund allocates 21 per cent to China, 21 per cent to Australia and 13 per cent to Indonesia. The benefit of the country weightings is that the fund is providing access to parts of these countries where money must be spent (satiating the need for energy) as opposed to banks or companies that rely on spending by U.S. consumers.
It would be logical to wonder whether a solar fund might be a better way to go. There is a glut of solar components, which creates a fundamental headwind for those stocks if oil goes up in price. Coal is cheaper and the infrastructure to consume coal already exists, which isn't the case with solar. If the Chile and coal ETFs are doing poorly, it's likely the entire market is doing poorly. In that case, it would make sense to get exposure to consumer staples. After all, consumption patterns for things like toothpaste, cheese and diapers don't change often. That's what also keeps staples from leading in bull markets.
The Consumer Staples Select Sector SPDR is a good way to insulate a portfolio. The fund yields 2.56 per cent and is heaviest in companies including Proctor & Gamble , Wal-Mart and Philip Morris International . It's a boring fund, which is exactly what you want if the market falters.
At its low, the consumer staples fund was down 30 per cent versus 56 per cent for the S&P 500. Since the March 9 low, it's up 40 per cent versus 60 per cent for the S&P 500. Down less and up less is exactly what it should do -- smooth out the ride. While most people would hope that the market can keep going higher, after a 60 per cent rally it makes sense to be concerned with whether some sort of correction is in order.
If everything you own is as volatile as the Global Coal ETF, you'll feel a lot of pain when stocks decline. Likewise, too much exposure to the staples sector means getting left behind when equities run flat out. Success comes from blending both types of holdings in a mix you can live with.