Following a historic market rally, 2010 will be a very interesting year for equity markets. It may be the year where we will need to see a clean hand-off between public support via the stimulus programs to private enterprise in order for the market to remain orderly. Considering that the outlook for unemployment will continue to remain bleak into next year, once the government lifeline begins to stop flowing, we may experience a period of contraction. For many investors, exchange traded funds (ETFs) may be the best way to gain exposure to quality industries without being solely exposed to a single company. Many investors simply do not have the time or ability to properly assess the merits of individual companies. Picking the right ETF is a great alternative.
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You want to choose an ETF like you would any stock. If you think that an industry is overvalued or its fundamentals are poor, then avoid any ETF that focuses in that area. After all, an ETF is nothing more than a basket of stocks. Going forward, there are some industries that have excellent long-term prospects. Agriculture is one such industry and the Market Vectors Agribusiness (NYSE: MOO) ETF provides an excellent way to play this bet. With the growing appeal of infrastructure in today's global economy, the iShares Global Infrastructure ETF (NYSE: IGF) enables investors to participate in overseas infrastructure firms that would otherwise be difficult to analyze individually. Despite the surge in gold prices in the second half of 2009, many investors continue to favor gold as a hedge against uncertainty and monetary instability. The SPDR Gold Shares (NYSE: GLD) is an ETF devoted specifically to gaining exposure to gold bullion. Its value is strongly correlated with the price of gold.
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In addition to simply buying the ETF, spend some time examining the holdings of each one. While ETFs offer the safety of diversification, it's performance rests solely on the performance of the underlying holdings. And often many of the individual securities will perform much better than the overall ETF. And because an ETF is usually buying the predominant names within a sector, you may sometimes wish to consider the individual holdings if your research suggests such a position. For example, while MOO is up nearly 60% since March, its top holding Potash Corp (NYSE: POT) has seen periods where it has performed approximately 20% better than MOO. So take the time to screen an ETF and see if an individual company looks like a better play.
Keep It Simple
ETFs have exploded in popularity over the years. There seems to be an ETF for just about every angle. Stick to a few names that represent excellent fundamental bets. (For related readings on investing with ETFs, refer to Active Vs. Passive ETF Investing, Mutual Fund Or ETF: Which Is Right For You? and ETFs: How Did We Live Without Them?)
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