ETFs Strategies for the Top Ten 2014 Predictions of Bob Doll

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Bob Doll, Chief Equity Strategist and Senior Portfolio Manager of Nuveen Asset Management, is out with his ten predictions for 2014. His predictions are followed by many, and he scored a 7.5 out of 10 rating according to the report.

24/7 Wall St. wanted to add a twist here. We included exchange-traded funds and exchange-traded notes for investors who want to make longer-term positions. After all, many investors are still trying to position their portfolios for 2014 and beyond.

Doll expects broader and stronger U.S. and global growth that is still considered to be moderate economic growth in 2014. The good news is that he only expects bond yields to rise gradually. Doll also noted that Europe is emerging from recession and that China is showing some signs of stabilization.

Another prediction is for stocks to do well, even with some calling them expensive. Doll said, “While stocks are vulnerable to a correction any time given their recent strength and some technical deterioration, we continue to favor a moderate pro-growth posture with forward long-term potential to mid- to high- single-digit annual percentage gains.”

Here are Bob Doll’s 2014 Ten Predictions, and we have added those ETFs to the mix. Again, these added ETF example were added by 24/7 Wall St. rather than by Nuveen or Bob Doll.

1. The U.S. economy grows 3% as housing starts surpass one million and private employment hits an all-time high – All time high on private employment? 1 million housing starts?

  • Homebuilder ETF: SPDR S&P Homebuilders ETF (NYSEArca: XHB) as it is tied to homebuilders and building products rather than including other sectors that only overlap in building. At $32.57, its 52-week range is 426.94 to $33.38. Housing Starts were always well over 1 million on an annualized basis each month before the recession, but they only reached that in two months of 2013 (St. Louis Fed data).

2. 10-Year Treasury yields move toward 3.5% as the Federal Reserve completes tapering and holds short-term rate near zero – This may sound bad, but it is actually good and fits in line with rates not rising too much. Keep in mind that the 10-year Treasury is at 2.94% now and ended at 3.03% on the last day of 2013. Elsewhere on the yield curve, Doll sees many parts of the fixed income market to end 2014 with negative total rates of return.

  • ETF Recommendation: Sorry, not enough losses to merit a short-treasury ETF or ETN.

3. U.S. equities record another good year despite enduring a 10% correction – Another 10% correction call, followed by a bull market resumption…. Doll expects that market gains will depend more on earnings growth rather than further multiple expansion. He also would use pullbacks as buying opportunities as most fundamentals continue to improve.

  • ETF Recommendation: SPDR S&P 500 (NYSEArca: SPY) for broad market, or iShares S&P 500 Growth (NYSEArca: IVW) for a growth focus.

4. Cyclical stocks outperform defensive stocks – This puts consumer discretionary, energy, financials, industrials, technology and materials all doing better than consumer staples, healthcare, telecom, and utilities. Doll also prefers a free cash flow yield to dividend yield and dividend growth over dividend yield.

  • ETF Recommendation(s): Financial Select Sector SPDR (NYSEArca: XLF), Technology Select Sector SPDR (NYSEArca: XLK), Market Vectors Oil Services ETF (NYSEArca: OIH)… Avoid Consumer Staples Select Sector SPDR (NYSEArca: XLP) and Utilities Select Sector SPDR (NYSEArca: XLU).

5. Dividends, stock buy-backs, capex, and M&A all increase at a double-digit rate – This is led by a lot of cash flow, underleveraged balance sheets, and possible great places to use cash. The argument for higher cap-ex is as follows: “Pent-up demand and aging of plant, equipment and technology argue for increases in those key areas.”

  • ETF Recommendation: Vanguard Dividend Appreciation ETF (NYSEArca: VIG) for dividend growers, and PowerShares Buyback Achievers (NYSEArca: PKW) for buyback stocks. Hint: the buyback ETF rose by 45.5% in 2013 after dividend adjustments versus 28.8% for the dividend growth ETF.

6. The U.S. dollar appreciates as U.S. energy and manufacturing trends continue to improve.

  • ETP Recommendation: PowerShares DB US Dollar Index Bullish (NYSEArca: UUP), tracking the Deutsche Bank Long US Dollar Futures index – aims to replicate the performance of being long the US Dollar against the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc.

7. Gold falls for the second year and commodity prices languish – Doll’s view is that all factors point to further pressure on gold.

  • ETP Recommendation: SPDR Gold Shares (NYSEArca: GLD) as a short-sell, or maybe just as an avoid. The PowerShares DB Gold Short ETN (NYSEArca: DGZ) is the short bet as it aims for the inverse of the daily performance of the Deutsche Bank Liquid Commodity index – Optimum Yield Gold Excess Return, but investors know by now that short ETFs have erosion, particularly when they use futures contracts.

8. Municipal bonds outperform taxable bond counterparts – The move is predicted to be led by high-yield after serious outflows from municipal bond funds. Doll’s take: the pricing of municipal securities relative to taxable fixed income securities more than take that into account.

  • First Recommendation: Nuveen Municipal High Income Opportunity Fund (NYSEMKT: NMZ) as a high-yield closed-end fund municipal bond fund. The fund may invest up to 50% of its managed assets in municipal securities rated below investment grade quality, but no more than 5% of the managed assets may be invested in munis rated at or below B3/B-.
  • Second recommendation: Market Vectors High-Yield Muni ETF (NYSEArca: HYD)

9. Active managers outperform index funds – This stance is one which has been an ongoing issue for years and years with most managers underperforming benchmarks. Doll believes that active managers have a better chance to outperform when markets and sectors have less correlation.

  • First recommendation: IQ Hedge Market Neutral Tracker ETF (NYSEArca: QMN), but super-thin trading volumes. Market Neutral hedge funds typically invest in both long and short positions in asset classes while minimizing exposure to systematic risk. These generally have lower volatility as well.
  • Second Recommendation: AdvisorShares Ranger Equity Bear ETF (NYSEArca: HDGE) as a short seller ETF. It has performed horribly because of the rising equity markets, but it targets what it sees as flawed businesses or questionable accounting practices.

10. Republicans increase their lead in the House but fall short of capturing the Senate. An except shows that the November mid-term elections will soon dominate Washington with the likelihood of Republicans slightly increasing their lead in the House of Representatives, and increasing representation, but failing to control the Senate.

  • ETF Recommendation: Not Available.

The report claims that Doll’s total score on his 2013 predictions came to 7.5 out of 10, with only two incorrect issues. Those two predictions were around emerging market equities outperforming developed market equities and over the U.S. government passing a $2–3 trillion ten-year budget deal. His half-correct answer was regarding large-cap stocks outperforming small-cap stocks and cyclical companies outperforming defensive companies.