Few sectors of the market caught a break in 2008. Uncertainty seems to be the theme so far in 2009, but that hasn't kept analysts and market watchers from predicting which slices of the market are poised for blastoff. An easy and low-cost option for average investors to tap into specific areas of the market is exchange-traded funds, which behave like stocks but track indexes (the ETF universe contains a mind-boggling array of choices). Keeping in mind that anything can happen in these volatile times, here are nine ETFs with solid prospects in the new year and beyond:
Overseas stocks. After generating red-hot returns for most of this decade, international stocks took a hair-raising 41 percent tumble in 2009. Now, a growing chorus of analysts and money mangers see a recovery on the horizon. One of the most diversified international ETFs is iShares MSCI EAFE (EFA), which holds some 800 large companies in developed markets across Europe and the Asia-Pacific region. Even if foreign stocks drag their feet, the fund pays a nice dividend in the meantime (recently 6 percent).
Industrials. Building and materials companies were pummeled in 2008, but some investing pros are touting an upswing in construction- and infrastructure-related industries set to benefit from Obama's proposed stimulus package, which would send government money flowing into roads, bridges, and transportation. Industrial Select Sector SPDR (XLI) holds a basket of roughly 60 such stocks that focuses on market heavyweights like General Electric, Boeing, and Caterpillar. Another option is iShares S&P Global Infrastructure, which spreads its bets among large and midsize companies in countries including the United States, Canada, Australia, and Japan.
Alternative energy. Another industry that stands to benefit in an Obama presidency is alternative energy. His plan to spend $150 billion over 10 years means there will be more investment in industries like solar and wind. That bodes well for such ETFs as PowerShares WilderHill Clean Energy Portfolio (symbol PBW), which focuses on U.S. companies, and Market Vectors Global Alternative Energy (GEX), which invests abroad.
Japan. The world's second-largest economy looks to be a compelling investment for 2009, says Gary Gordon, president of Pacific Park Financial and an ETF blogger. His outlook is partly based on technical fundamentals (the country's broad market index is trading at a low price-earnings ratio and an attractive price-to-book value). But Japan's prospects are also improving because of a demographic shift that's sending more Japanese consumers into their peak spending years. Another indication of recovery: "Japan's small caps are taking off, and small caps start to recover before the overall market," he says. Gordon's a fan of iShares MSCI Japan (EWJ), which includes more than 300 mostly large companies spread across various industries.
China. Although enthusiasm for China has been waning, Jim Wiandt, editor and publisher of the Journal of Indexes and publisher of IndexUniverse.com, says it would be unwise not to put some money to work in a country that "clearly will be the driver of the global economy." What's more, China is cheap: iShares FTSE/Xinhua China 25 Index (FXI) is trading close to $26, which is less than half of its price a year ago. If you want to spread your bets among more stocks, SPDR S&P China (GXC) contains some 125 holdings in such industries as telecommunications, financial services, and energy.
Preferred shares. Part stock, part bond, preferred shares are what they sound like: a cushy investment. Should a company encounter problems, preferreds rank in pecking order for distributions behind bonds but ahead of common shareholders. "Common shares are still at risk for dilution or outright seizure, but preferred shares are better for claims—and [individual issues] can yield around 12 to 13 percent," says Scott Burns, Morningstar's director of ETF analysis. For conservative investors, he likes PowerShares Financial Preferred Portfolio (PGF), which leans heavily on financials and yields 6.8 percent.