A trio of top ETFs for 2013

by Mark Salzinger, editor Investor's ETF Report

This month we survey our top picks for the coming year. These are the ETFs that we believe offer the best potential for gains relative to their risks.

Here's a look at our favorites among U.S. equity funds, foreign stock funds, and fixed-income ETFs.

U.S. equity ETFs

Our favorite U.S. stock ETF for 2013 is iShares S&P Mid Cap 400 Growth (IJK). Since we added this ETF to
Wealth Builder in September, it has gained 5.2%, vs. 2.2% for SPDR S&P 500.

Over the long term, mid caps have outperformed large caps, but with less volatility than small caps. We think mid-cap ‘growth’ stocks are attractive now because of their overall valuation, growth prospects and attractive sector exposure.

IJK’s portfolio offers reasonably well diversified sector exposure. Technology and consumer discretionary stocks lead the way with about 20% of the portfolio each, but the portfolio also has significant helpings of industrials (18%), financials, mostly REITs and asset managers (17%) and healthcare (11%).

Foreign stock ETFs

Vanguard FTSE All-World ex-US (VEU) is as simple as it comes in foreign-stock investing: it owns a market-cap weighted portfolio of non-U.S. stocks from virtually everywhere else stocks are offered.

Through this one package, investors gain exposure to developed markets (including Europe, Japan, Canada and Australia) and emerging markets (such as China, Brazil, Russia and emerging Asia). It levies a miniscule expense ratio (0.18%) and recently sported a decent yield (3.3%).

VEU’s forward P/E was recently 11.8, making non-U.S. stocks less dearly valued relative to U.S. stocks. VEU’s dividend is also stronger than that of the broad U.S. stock market.

Fixed-income ETFs

Most U.S. fixed-income investments are not particularly attractive. They have very low yields relative both to history and prevailing risks, which include interest rate sensitivity and economic sensitivity.

However, we think that emerging market bonds offer attractive yields relative to their risks and prospects—and we especially like emerging market bonds denominated in local currency.

So our top fixed-income pick for 2013 is WisdomTree Emerging Market Local Debt (ELD). Recently, about 90% of ELD’s portfolio was rated investment-grade and yielded 3.8%. For minimally more credit risk, investors in ELD earn a full percentage point more in yield than investment grade corporates.

ELD’s portfolio is actively managed and tiered. The heaviest allocations go to the countries that the managers believe have an attractive combination of stability and potential.

Recently, Mexico, Brazil, Indonesia and Malaysia each got about 10% of the portfolio; Poland, Turkey, South Korea, Russia, Thailand and South Africa each got about 7%; Peru, the Philippines, Chile, China and Colombia each got about 3.3%. ELD’s expense ratio is 0.55%.

Learn more about this financial newsletter at Mark Salzinger's Investor's ETF Report.

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