Whatever the reason, the last three weeks have been pretty ugly for U.S. equities. While excuses abound, there are also avenues for investors to protect their portfolios and profit along the way. The world of ETFs offers investors dozens of choices for the current market environment. For the risk averse, we decided to eschew double and triple leveraged ETFs in favor of ETFs that are appealing to a broader cross section of retail investors. (To learn more about leveraged ETFs, read Rebound Quickly With Leveraged ETFs.)
Let's have a look at a few ETFs investors can use to cope with the recent market volatility and bearish moves.
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King Dollar Once Again Royalty?
One of the most prevalent themes from 2009 was the weaknesses of the U.S. dollar. As the U.S. economy sputtered and Uncle Sam issued mountains of new debt, many market observers viewed the greenback as an imperiled currency destined to lose its status as a safe-haven and the world's reserve currency. And with the boom in commodities prices, the dollar's performance was hampered even further because commodities are denominated in dollars, so rising gold and oil prices are bearish for the buck.
Of course, things change quickly in financial markets and, with risk appetite waning in thus far in 2010, the dollar has benefited. This is making the PowerShares DB U.S. Dollar Index Bullish ETF (NYSE:UUP) worth a look at a time of pronounced market volatility. With commodity prices showing some weakness and fears over European debt defaults, the dollar climbed to an eight-month high on February 5th. Let's not forget that gold is losing its luster as a safe-haven, meaning the dollar may have even more room to appreciate if volatility continues to rule the roost.
For investors looking for a conservative way to protect their equity holdings while grabbing some forex exposure, UUP is a choice worth exploring. The ETF is up nearly 3% year-to-date while the S&P 500 is down more than 4%.
Is The Sun Rising Again For Japan?
If you had gone hunting for Asia Pacific-related ETFs in 2009, your search probably would've glossed over Japan. The world's second-largest economy has been lagging for better than a decade, if not longer, and the country could lose its status as the world's number two economy to China by the end of 2011. The recent news hasn't been great either. JAL, Japan's largest airline, declared bankruptcy in January and Toyota Motor (NYSE:TM) is enduring a public relations nightmare in the U.S. tied to the safety of its vehicles.
Those factors may keep investors from considering the iShares MSCI Japan Index ETF (NYSE:EWJ), but take a closer and you'll see this ETF might hold some opportunity. Japanese stocks are trading at an above average historical discount to the S&P 500 and, while EWJ is barely positive on the year, it has sharply outperformed many of its emerging markets counterparts.
Trading below $10 and less than $1 off its 52-week high, EWJ could be a prudent way for investors to get international exposure without the risks of emerging makets.
Small Banks, Big Returns
For all of the pain financials have endured in 2010, there are still opportunities in this sector for the astute investor. One of them appears to be the SPDR KBW Regional Banking ETF (NYSE:KRE). Regarding this ETF, it is important to note what regional banks are not featured among the top holdings. Many investors think of regional banks in terms of BB&T (NYSE:BBT), PNC Financial (NYSE:PNC) and U.S. Bancorp (NYSE:USB). While these are regional banks, they are often beholden to the same negative catalysts that impact their larger rivals.
On the other hand, KRE focuses on smaller, more conservative names and that may be one reason the ETF has been a winner in 2010. KRE clearly proves that investors don't need to incur unnecessary risk to profit in the financial services sector. The ETF is up 4% on the year. With the Obama Administration taking steps to help smaller community banks - like those found in KRE - lend more money, more gains could be on the way for this ETF.
Bottom Line: Less Risk, Plenty Of Reward
Sure, the trends may change again and high-beta fare may come back into vogue, but for right now, the market is sending signals that taking too much risk is, well, too risky. These ETFs can help you stay the course in an environment where caution is going to be rewarded. (Learn more about beta, read Beta: Know The Risk.)
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