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Monday January 14, 2013
Top funds 2013: iShares EAFE Index ETF
by Marvin Appel, editor Systems and Forecasts For aggressive investors, we recommend buying the iShares MSCI EAFE Index ETF (EFA) and writing covered calls (using LEAPS) expiring on January 18, 2014 at the strike price with the most time value. For example, with EFA trading at $56.52 as of this writing, the $55 calls (slightly in the money) are quoted at $5.00 bid. The maximum total return on this position would be the $3.48 in option time value plus the estimated $1.75 in dividend distributions from EFA (assuming that last year’s pace of dividends is maintained in 2013). That represents a potential maximum return of 9.25%. There are a number of reasons I recommend this position. First, EFA began outperforming the S&P 500 SPDR (SPY) in mid-July. This five-month trend favoring foreign developed-country stocks is potentially significant, representing the biggest outperformance in foreign equities since mid-2010. Moreover, EFA still has a lot of upside potential to recover in absolute price and in its price relative to the S&P 500 before it revisits its level $62 where it traded in June 2011. On the other hand, the current bull market is getting on in years, and with corporate profits slowing it is hard to see stocks putting in two consecutive years of strong gains. So upside potential for 2013 appears to be just moderate. The good news for equity investors is that the world’s central banks, soon to be joined by Japan in the wake of their recent election, are printing money aggressively. That should limit the downside potential in the event of a market correction. The 9.25% potential return is in the form of option premium and dividends, which will be available to significantly mitigate any losses that might occur in the event of an intermediate-term market correction in 2013. Bottom line: The potential return is in line with what one would reasonably expect from simply buying and holding, while the income flow is sufficient to make this position much safer than holding EFA outright. Learn more about this financial newsletter at Marvin Appel's Systems and Forecasts. Related articles 
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