The Best ETF Ideas for 2016: Income

First off, I hope you had a fantastic Thanksgiving celebration! I love this holiday, and I hope it was good for you and your family and friends.

We have a lot to be thankful for in America. Despite the downbeat headlines around the world lately, we always must remember that we enjoy a standard of living greater than any time in human history. For that blessing, I am thankful.

I am also immensely thankful to you, the Weekly ETF Report reader, to subscribers to my Successful ETF Investing newsletter and to clients of my money management firm, Fabian Wealth Strategies. Without you, what we do here wouldn’t be possible.

Now, recall that last week we covered what I called the best exchange-traded fund (ETF) ideas for 2016, particularly if you are a growth investor.

Today, it’s all about the best ETF ideas for income. But first, let me give a quick review of the growth names we covered last week.

Here’s my list of the five best ETF ideas for growth investors in 2016. Some of these we currently own in the Successful ETF Investing newsletter, and some are just on our radar.

1) Health Care Select Sector SPDR Fund (XLV). Healthcare is an industry that continues benefitting from demographics, innovation, mergers and acquisitions (M&A) and insurance mandates. XLV is the ETF that holds the biggest and best healthcare stocks around.

2) First Trust Dorsey Wright Focus 5 ETF (FV). This is a “fund of funds” that simultaneously holds other funds that have allocations to top-performing sectors. Biotech, Internet, consumer staples, consumer discretionary and healthcare all are part of this fund.

3) PureFunds ISE Cyber Security ETF (HACK). This is the cybersecurity stock ETF, one that we’ve written about extensively in this publication, as well as in the Successful ETF Investing newsletter. We also recently conducted a FREE webinar on HACK, which I encourage you to check out before you start making investment decisions in 2016.

4) iShares India 50 ETF (INDY). India is a country that has a pro-capitalist political climate, a huge amount of human capital and citizens hungry for economic growth and an enhanced living standard. INDY is a way to get exposure to the companies benefitting most from these trends.

5) WisdomTree Japan Hedged Equity Fund (DXJ). Japan continues to put the pedal to the metal on “Abenomics,” which means more quantitative easing from the Bank of Japan and likely more upside for Japanese stocks. And, with DXJ’s hedge component, you get that performance without the negative influence of any currency disparities.

When it comes to growth in 2016, these are the funds I think represent great ideas going forward.

As for income ETFs, there is no shortage of great ideas as we enter 2016. The elephant in the room of a likely rate hike by the Federal Reserve in December will dominate the income landscape, but it won’t alter the picture when it comes to ways to generate yield from your assets.

Here are my five best ETF ideas for 2016 if your primary goal is generating income.

1) SPDR DoubleLine Total Return Tactical ETF (TOTL). This bond fund is actively managed by the “New Bond King,” Jeffrey Gundlach of DoubleLine Capital, and it takes advantage of the best bonds in the market. The fund invests across global fixed-income sectors with an eye toward shorter-duration bonds.

2) iShares US Preferred Stock (PFF). This fund gives you exposure to the best preferred stocks in the market. These hybrid securities are sort of like stocks and sort of like bonds, as they tend to move higher with the equity markets while also delivering strong yields.

3) PowerShares CEF Income Composite ETF (PCEF). This ETF “fund of funds” gives you exposure to the closed-end fund market. That market consistently has delivered outstanding yields for income-oriented investors.

4) iShares US Real Estate ETF (IYR). Real estate investment trusts (REITs) are a fantastic tool for generating yield. In this fund of funds, you get broad-based exposure to the best REITs operating in the market today.

5) iShares Select Dividend ETF (DVY). This is the best ETF for exposure to the biggest and arguably the best dividend-paying stocks in the market today. DVY gives you a very solid yield along with the upside potential of the broader equity markets.

If you want more ideas, including which funds we’re buying right now, then I invite you to check out my Successful ETF Investing newsletter today!

ETF Talk: This ETF Covers the Economy’s Basic Building Blocks

The industries covered in SPDR Materials Select Sector ETF (XLB) provide the inputs needed by a wide variety of other companies. The exchange-traded fund (ETF) holds a span of large companies that initially harvest and process different materials from nature, as well as provide other services necessary for more intermediary and consumer-facing companies to function.

All products must begin somewhere; this sector reflects the beginning of the production process for many final goods. Subsectors found in the index this fund tracks include producers of chemicals, metals, paper and construction materials, among others.

View the current price, volume, performance and top 10 holdings of XLB at ETFU.com.

The performance of this fund thus far in 2015 has been less than stellar, as it has declined by 5.48%. Though XLB outperformed the S&P at the beginning of the year, it fell behind in June and has not made up the difference since. The dividend yield, at just over 2%, more than covers the 0.14% expense ratio and offers a bit of extra incentive for investors. Currently, XLB’s assets managed come to about $2.1 billion.

The top 10 holdings of XLB make up about 67% of its assets. In terms of subsectors, chemical companies are the most important aspect of the sector, as a component of the S&P, by a wide margin.

XLB’s largest individual holdings are Dow Chemical Co. (DOW), 11.75%; E.I. du Pont Nemours and Co. (DD), 11.52%; Monsanto Co. (MON), 8.02%; LyondellBasell Industries NV (LYB), 7.73%; and Praxair Inc. (PX), 6.28%.

If you believe that the time is coming for this sector to rebound and make up for its underperformance soon, then SPDR Materials Select Sector ETF (XLB) may be a strong way for you to play it.

View the current price, volume, performance and top 10 holdings of XLB at ETFU.com.

If you want my advice about buying and selling specific ETFs, including appropriate stop losses, please consider subscribing to my Successful ETF Investing newsletter.

As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an e-mail. You just may see your question answered in a future ETF Talk.

6 Questions to Ask Before You Buy Any ETF

I often am asked by readers, radio show listeners and clients about exchange-traded funds (ETFs). Why I like them so much, why they are better than mutual funds, why I prefer them to individual stocks, etc.

Today, I am going to provide a few questions for you, questions you should ask yourself before you buy any ETF.

Here is my list of the six key questions you must ask before you commit your investment capital to an exchange-traded fund.

1) Why am I buying? Do you need to generate growth from your assets, or is income more what you are looking for? Are you buying this ETF for a long-term hold, or do you plan on trading the fund? The first question of why you are buying is all about you and your goals, so the more defined your objectives are, the better your outcome is likely to be.

2) What asset class am I buying? Is this ETF an equity (stock) fund, or is it a bond fund? Is it pegged to a specific market sector, or is it an inverse fund? Knowing what you are buying is critical, so make sure you are fully aware of what’s in that ETF.

3) What index is my ETF following? Is your ETF exposed to the S&P 500? Is it pegged to the Dow? Or, is it pegged to the NASDAQ 100? All three funds of this sort are broad-based equity funds, but they are not created equal in terms of composition and diversification. Knowing how diversified you are in a fund is important, and you know that by knowing what index the ETF follows.

4) What’s the cost? How much is that ETF going to cost you? What is its “expense ratio?” If you don’t know how much you’re paying for something, you can’t make a good decision about value.

5) What’s the asset size and volume of this ETF? Are you buying an ETF with a lot of liquidity and a lot of trading volume? Or, are you looking at an ETF with little assets under management and one that trades low volume. The answer here can make a difference when it comes to efficient trade execution and fund pricing, so be aware of the size of the ETFs you want to buy.

6) What’s my exit point? Do you know when you’re going to sell this ETF? How much downside can you handle? When will you take your winnings off the table? Only you can answer these questions based on your personal investing situation, but answer them you must if you want to be an efficient, and successful, ETF investor.

Finally, recently subscribers to my Successful ETF Investing newsletter received the first new domestic equity buy signal in some time. If you want to find out what we’re buying, then I invite you to check out the newsletter today.

Thanksgiving Humor

“Vegetables are a must on a diet. I suggest carrot cake, zucchini bread, and pumpkin pie.”

— Jim Davis

If you are like most Americans, today you are probably feeling just a little guilty about the extra calories you consumed yesterday. While I certainly can sympathize, it’s also helpful to keep a little humorous perspective about the situation. Here, cartoonist Jim Davis (of Garfield the cat fame) provides the requisite laughter we all should keep in mind.

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Ask Doug.

In case you missed it, I encourage you to read my e-letter column from last week about my best ideas for growth investors in 2016. I also invite you to comment in the space provided below my Eagle Daily Investor commentary.

All the best,

Doug Fabian