Five ETFs To Consider As Interest Rate Fears Lift

by: Gary Gordon posted on: June 13, 2007 | about stocks: EFV / KXI / TIP / VTV / XLP

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Traditional and non-traditional media sources agree on one thing: Higher interest rates are spooking the equity markets across the world.

Granted, there's some truth in that. Yet one may easily point the finger at higher gasoline prices, slower economic growth and/or good 'ol fashioned profit taking. (Even history plays a role, meaning... June is not a favored son in the 12-month market rotation.)

Fundamentally speaking, though, not a whole lot has changed since May 31. On close inspection, in fact, the majority of risks to stock market growth remain low.

For example:

1. Risk of Recession. With the exception of a downturn in housing that saps about 1% off the gross domestic product [GDP], the economy is growing at a slow pace. In GDP terms, it may approximate 2% to 2.5%. It is slow enough that the Fed cannot realistically raise interest rates, even if investors worry that the Fed would do just that. Those who genuinely fear Fed rate hikes should consider the Consumer Staples Select Sector Fund (XLP) or the iShares S&P Global Consumer Staples Fund (KXI).

2. Risk of Inflation. No matter how the Fed slices it, core inflation is at 2%. This has dropped into their comfort level after months and months of complaining about elevated inflation. With a slower economy that resulted from higher interest rates and overheated housing, inflation is not the bugaboo that'll bring the market to its knees in 2007. That said, hedging one's portfolio against inflation is often achieved with an allocation to the iShares Lehman TIPS Bond Fund (TIP).

3. Risk of Over-Valuation. This one may bug me the most. Far too many pundits have talked about the stock market being overvalued. At best, this is healthy skepticism based on a cyclical bull market having made great percentage strides over the last 4+ years. More likely, though, it is a sign of laziness and/or ignorance. At the height of dot-com mania, price-to-earnings (P/E) ratios were almost 2x the historical average of 16. Today, we are back at that historical average.

Simply stated, the main risks to stocks are a bit overblown. It follows that incremental purchasing into market pullbacks may make sense for investors with dollars on the sidelines. Broad market exposure would best be achieved with a tilt towards tried-and-true, long-standing companies. Some examples include: Vanguard's Value Exchange-Traded Fund (VTV) and the iShares MSCI EAFE Europe Value Index Fund (EFV).

Disclosure Statement: As a Registered Investment Advisor, Pacific Park Financial, Inc. may hold positions in the ETFs, mutual funds and/or index funds mentioned above.

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