The "Sixth Sense" About 2013
Mike is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There are many variables at play in the markets starting off 2013, most notably here at home with looming decisions on government spending cuts. Even with numerous obstacles threatening the global economy, there has been a steady resilience in the US, a rebound in China, and even some semblance of stability emerging in Europe. All of these factors are creating a greater degree of cautious optimism about the year ahead.
There is almost unanimous consensus among leading economists and analysts that the first half of 2013 will be sluggish, but the prevailing wisdom is staking claim that the later months should see a nice resurgence. US firms have been revising their earnings estimates downward since last fall, and the numbers that companies have reported so far in the current quarter prove that profits are slowing. Some of this can be attributed to the uncertainty about how Washington will deal with national debt and spending issues, but the economic cycle also needs to be taken into account. Historically speaking, there is a decrease in demand leading to recessionary conditions every five to six years. The current positive trends have been in place since mid-2009. Yet, the US has experienced a recovery period over the last three and half years that is unlike others in its past as companies have hoarded cash and postponed business expansion along with hiring. This dynamic has led to a new phrase being coined: "American business being held hostage by its political dysfunction."
Several reports that I have reviewed in recent months share the sentiment that traditional annual growth rates of 6% are no longer feasible. The general rationale has coalesced around the sentiment that an average annual global GDP of 3% is more attainable given the current political and economic instability in the advanced Western markets. If true, this sustained level of diminished productivity will compress corporate profits and further stagnant job creation.
Despite these pressures, stocks may be finding wind at their sails. Investors have grown tired of the low rates in fixed income and have begun shifting their money back to the equity side of the house. With dividends at nearly double the rate of US Treasuries, people can no longer deny the attractiveness of the market any longer. Last year's 16% total return in the S&P 500 was one of the least participated rallies in recent memory as average volumes remained depressed, thus it was called the "market everyone hated." Now it seems like the masses have decided it’s better to be in the game with a chance to win than sit on the sidelines and watch others take all the prizes. The flow of funds into stocks has steadily increased since early January, and this bodes well for additional gains in the market over the near term.
With all this as context for the investing landscape over the next 12 months, here are my "Sixth Sense Investment Picks" for 2013:
SPDR S&P Dividend ETF (NYSEMKT: SDY)
- I decided to open up the core holding spot after two years with Wisdom Tree's Dividend Ex-Financials Fund. It was a good ride, but wanted to explore other dividend-oriented ETF's for this year.
- In selecting SDY, we find a fund that tracks the highest dividend yielding stocks in the S&P 500 and then selects those that have increased their dividends for at least the last 25 years. Thus we are capturing the strongest stocks in the large cap space, and being rewarded for it.
- 40% of the fund’s holdings are split between the consumer staples and industrial sectors, but SDY also offers exposure to all areas of the economy.
- A healthy 3.09% dividend yield.
- YTD return as of January 31st = 6.43%
- 1 yr = 16.67% / 3 yr = 14.97% / 5 yr = 6.28%
Wisdom Tree Mid-Cap Dividend Fund (NYSEMKT: DON)
- The thinking behind this pick is to capture growth in different sized companies than what we will have in SDY.
- This fund has roughly 80% of its holdings in the sectors of consumer discretionary, utilities, financials, industrials, and basic materials.
- If the experts are right about a second half rebound, DON positions the portfolio to have a significant upside with solid mid-cap names to lead the way.
- In typical Wisdom Tree style, this ETF is weighted based on annual cash dividends to be paid by each company included in the tracking index. With this structure, DON provides a dividend yield of 3.02%.
- YTD return as of January 31st = 7.10%
- 1 yr = 14.86% / 3 yr = 13.68% / 5 yr = 5.50%
iShares MSCI All Country Asia Ex-Japan Index (NASDAQ: AAXJ)
- For the international piece of the portfolio, I am looking to Asia as a region that has solid growth prospects with less political and economic risk than Europe or Latin America at this point.
- With China having steadied itself after a rocky 2012, the engine is primed once more to be the catalyst for the region and set the pace for capturing gains going forward.
- The devaluation of the yen along with the Bank of Japan warning of the nation's economic weakness makes AAXJ even more attractive by excluding the "land of the rising red flags."
- Dividend yield of 1.74%
- YTD return as of January 31st = -0.08%
- 1 yr = 11.89% / 3 yr = 7.02%
First Trust Healthcare AlphaDEX (NYSEMKT: FXH)
- This sector has been on my radar as a potential speculative position for two years and this ETF has the structure I was looking for to approach this space.
- First Trust's "AlphaDEX" quantitative selection process uncovers those healthcare stocks with the most attractive valuations and discards the bottom 25% of the sector.
- FXH is not heavy in pharmaceuticals, which was a key factor in selecting this fund as I wanted to minimize the volatility inherent to drug companies.
- Instead, this fund has 38% of its holdings in healthcare providers, 24% in biotech, and 18% in medical equipment.
- YTD return as of January 31st = 9.09%
- 1 yr = 20.81% / 3 yr = 15.00% / 5 yr = 10.21%
This is the "Sixth Sense" lineup for the year ahead. We will be looking to match the 15.29% total return posted in the portfolio for 2012 while also continuing to build on the two-year average of 12.53%. The all-ETF strategy that began as an experiment has proven to be a tactical and cost-efficient method for investing in a "monitor and adjust" manner. As we track the portfolio in the months ahead, I encourage readers to become better educated about the various investing tools available to them and take more control of their long term money.
MRCoffeeCents is long SPDR S&P Dividend ETF The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!
The 2012 "Sixth Sense Investment Picks" included: DTN, TIP, EDIV, PRN, and FXD with a total return of 15.29%.
The 2011 edition included: DTN, PSR, PSL, and XLI with a total return of 9.77%.