Next year the EOY special will be a DVD. (grin) I think I have developed some serious brain damage trying to come up with the ideal portfolio of ETFs. I thought the stocks under $10 were hard because of all the new entries in that category thanks to the recession. ETFs were even harder.

A stock is a single entity, single purpose with fundamentals. An ETF can be a combination of stocks in a sector, a mixture of like sectors, a clone of an index, a mixture of commodities and stocks, etc.

The various weighting schemes would give a math major a permanent headache. There is cap ex weighting, volume weighting, dividend weighting, performance weighting and even equal weighting. That means a stock like Exxon with a $426 billion market cap can be as much as 25% of the ETF value or be pared with a stock like AXAS with a $500M market cap on an equal basis.

Add in the 2X and 3X leveraged ETFs and the long and short varieties and there are over 1,000 ETFs and almost no two are alike. There may be similar names and objectives but once you get under the hood the only similarity is in the name on the ETF.

I researched over 600 ETFs and spent an inordinate amount of time comparing components, weightings, charts and management differences. I would NOT recommend anyone ever undertake this project on your own. In the end I ended up kicking 99% of those ETFs I researched back off the list. The duplication even among dissimilar ETFs was surprising and depressing.

Even worse I was surprised by how many dissimilar ETFs tracked tick by tick with the S&P. Sometimes the charts were so similar they were indistinguishable from each other. My thought at that point would be just buy the SPY and forget it but fortunately there are some ETFs that shine or at least give you the opportunity to capitalize on a specific market trend.

I did not really delve into the stock index ETFs. Everybody knows what they are and it would be a waste of digital ink to list a couple here. I do think every portfolio should have at least one so in an effort to present a balanced list I did recommend the IWM.

It is hard for me to really get excited about anything outside the energy sector. When you know there is a fundamental once in a lifetime event occurring in energy, everything else pales in comparison. However, I restricted myself to only a couple energy plays.

I am also showing my long-term bias with some commodity and metals offerings. Despite uncle Ben's assurances that inflation is not a problem, I am pretty sure it is going to be a very big problem in the next couple of years. This means commodities and metals are going vertical at some point in the future.

Lastly the only sector ETF I am recommending is in home construction. The builders are probably going to catch fire over the next six months and the builder ETF is still in the basement. When the building surge comes we want to be along for the ride. It may take a while but it will come.

I did not include any leveraged ETFs. A leveraged 2X or 3X ETF will normally turn in less than ideal performance when held for more than a 2-3 day period. The leverage is accomplished in a myriad of ways and works great as long as the trend lasts. If a sector is up four days in a row then a leveraged ETF will give outstanding performance. Once that trend turns choppy with alternating gains and losses the leveraged ETF begins to lose value because of the impact of time decay on the derivatives and the active management. A leveraged ETF should only be used for very short term trading around some pivotal event.

I view the time frame on the ETFs I am recommending as 8-12 months. On the inflation hedges that timeframe will probably stretch to two years.

Please use stop losses. Just because I see the future working out in a particular direction today does not mean that direction will appear or last once it does appear.


Top Ten ETFs


IWM - Russell 2000 Index

This is the only overall market related ETF I am suggesting. I believe everyone should have some index exposure to the market. That helps to smooth out the bumps when some stock your holding misses an earnings estimate. You have the luxury of offsetting those individual stock losses with gains in the broader market.

Definition:
The ETF seeks investment results that correspond generally to the price and yield performance of the Russell 2000 index. The fund invests at least 90% of assets in the securities of the underlying index. It uses a representative sampling strategy in order to track the Russell 2000 index, which measures the performance of the small-capitalization sector of the US equity broad market. The fund invests in approximately 2000 of the smallest capitalization-weighted companies in the Russell 3000 index.

Link to ETF description: IWM Description

This ETF is optionable and has LEAPS.

Buy Russell 2000 ETF, symbol IWM, currently $82.27

Chart of IWM


XOP - S&P SPDR Oil & Gas Exploration

There are literally dozens of energy ETFs. The energy sector was probably the most ETF congested because of the various sub-sectors in the energy field. There is exploration, production, refining, equipment, services, distribution and then you can break those into either oil or gas or both. There are probably more leveraged ETFs in the energy sector than any other sector.

The price of oil is going to decline from its current lofty heights at $110 (Brent) because there is plenty of oil in inventory today. There will be a shortage of light crude if the problems in the Middle East do not end soon but I don't expect prolonged high prices until 2012.

However, oil prices over $90 in general are very good for oil company profits. If oil stayed in the $90-$100 range for the next two years the producers would be printing money. If you can only afford to buy one of two ETFs please make sure one of them is in the energy sector.

Definition:
The SPDR S&P Oil & Gas Exploration & Production ETF seeks to replicate as closely as possible, before expenses, the total return performance of the S&P Oil & Gas Exploration & Production Select Industry Index.

The XOP is an "equal weighted" market cap index. That means XOM has the same 2.62% weighting as EOG Resources or Apache Corp.

Link to ETF description: XOP Description

This ETF is optionable and has LEAPS.

Buy S&P Oil & Gas SPDR, symbol XOP, currently $61.64

Chart of XOP


PXI - Powershares Dynamic Energy

Despite the term "Dynamic" this is not a leveraged ETF. Instead this is an actively managed ETF where only the stocks "shown to possess the greatest capital appreciation potential" are selected. I like it because it is not built to just copy a generic index. Obviously nobody is perfect in their stock selection but you would hope that a rule based selection process would beat the sector and the market the majority of the time.

Description:
The PowerShares Dynamic Energy Sector Portfolio is based on the Dynamic Energy Sector Intellidex Index (Index). The Fund will normally invest at least 90% of its total assets in common stocks that comprise the Index. The Index thoroughly evaluates companies based on a variety of investment merit criteria, including fundamental growth, stock valuation, investments and risk factors. Securities shown to possess the greatest capital appreciation potential are selected by the Index.

Link to ETF description: PXI Description

This ETF is NOT optionable.

Buy Powershares Dynamic Energy ETF, Symbol PXI, currently $42.33

Chart of PXI


KOL - Market Vectors Coal ETF

Coal was kicked to the curb with the Democrats took office in 2008 on worries the emissions regulations would put the power companies out of business. That was actually a threat during the campaign. Here we are two years later and coal stocks are consolidating after a nice rally around the midterm elections. With the current composition of the House there are no expectations for any major anti-coal legislation to pass.

Coal is still our number one fossil fuel for generating electricity. It may not be clean but recent changes are making it "cleaner" and coal plants are still being built. We will depend on cheap coal for decades to come.

The only problem is that coal is no longer cheap. Coal prices have rocketed higher on increased demand both in the USA and overseas. The demand for metallurgical coal is exploding. Steel production around the world is at an all time high for peacetime.

Floods in Australia have taken several coalmines offline for several months. The increased demand and shrinking reserves of met coal and coal for electricity has prompted a wave of consolidations that may not be over.

Don't write off coal as an energy source of the past. Your great grandkids will still be watching TV that is powered by electricity generated with coal.

Description:
The Market Vectors Coal ETF seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Stowe Coal Index.

The Stowe Coal Index is a rules-based, modified-capitalization-weighted, float-adjusted index intended to give investors a means of tracking the overall performance of a global universe of listed companies engaged in the coal industry.

Link to ETF description: KOL Description

This ETF is optionable but does not have LEAPS.

Buy Market Vectors Coal ETF, symbol KOL, currently $47.58

Chart of KOL


URA - Global X Uranium ETF

Uranium demand is booming. It is actually growing so fast that by 2015 there is not going to be enough production to meet demand. There is currently not enough production to meet demand but that production is being supplemented with decommissioned warheads from Russia and from sales of previously mined uranium that was stockpiled by the nuclear countries many years ago. When these stockpiles are gone the price of uranium could easily triple.

Prices soared to more than $130 in 2007 after a flood at a mine upset projected delivery schedules. During the financial crisis the price declined below $40 but is back at $75 and rising today. Many analysts expect prices to hit $150 by 2013.

The problem is the massive number of nuclear reactors currently under construction or in the planning stages. Uranium prices are moving steadily higher as countries attempt to stockpile fuel for future nuclear power plants. Morgan Stanley claims there are 147 new plants under construction around the world. If you include those proposed or already in the permitting process the number rises to 330. China has 159 proposed plants, India 60, Russia 44 and United States 31. With slightly over 400 plants currently in operation the new plants will nearly double existing demand and far exceed supply. It takes 400 tons of uranium to fuel one reactor for one year.

The uranium ETF invests in the top uranium miners around the world. Every miner will become seriously profitable as prices continue to rise. The average cost to mine uranium according to Cameco and Denison Mines is $30 a pound but because of the short supply the spot price is in a permanent uptrend.

This is a new ETF but the investment premise behind it is sound. The volatility in the chart is due to the spikes in spot uranium prices and the relatively small capitalization of the uranium mining companies. News moves the stocks.

Please read this link for further background on the demand spike just ahead: Click here

Description:
The Global X Uranium ETF seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Solactive Global Uranium Index.

Link to ETF description: URA Description

This ETF is optionable but does not have LEAPS.

Buy Global X Uranium ETF, symbol URA, currently $20.89

Chart of URA


MOO - Market Vectors Agribusiness ETF

You have to love that symbol! The MOO ETF is perfect for capturing the increased food demand for our burgeoning planet. It is diverse in its holding with fertilizer, tractors, seeds and processors. It is also global in scope.

With our current population approaching seven billion early in 2012 and adding roughly 100 million more each year the amount of food required to feed this growing population is expanding each year. More and more land is being pushed into cultivation and crops on this marginal land require significantly more fertilizer. Within a very few years we are going to be straining at the productive limits of our capacity.

We have seen how food commodities have exploded higher over the last two years and the global economy has been in the dumps. As the economy finds traction and accelerates the wealth of the individual will grow and with that wealth, even if it is only a few more dollars a week, the desire for more and better food will increase.

The four largest holdings in the MOO ETF are Potash (POT), Mosaic (MOS), Monsanto (MON) and Deere (DE).

I believe these companies and the rest in the index will continue to be highly profitable for years to come as demand increases. You may remember in early February Caterpillar reported sales global sales in January had risen by more than 50%. John Deere's tractors and cultivators are also flying off the assembly lines.

There will come a time in the next decade when food scarcity will become the new global problem. For me this is a buy and hold ETF.

Description:
The Market Vectors Agribusiness ETF (MOO) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the DAXglobal Agribusiness Index. The DAXglobal Agribusiness Index is a modified market capitalization-weighted index designed to track the movements of securities of companies involved in the agriculture business that are traded on leading global exchanges.

Link to ETF description: MOO Description

This ETF is optionable but does not have LEAPS.

Buy Market Vectors Agribusiness ETF, symbol MOO, currently $56.18

Chart of MOO


DBA - Powershares DB Agriculture Commodity Fund

The DBA commodity ETF is another way to play the booming food business I described above. The DBA ETF invests in the actual commodities like cattle, hogs, soybeans, wheat, sugar, etc. I am sure you have heard about "food inflation" in recent months. Once the inflation cycle really kicks in these commodities priced in our deflating dollars are going to rocket higher.

When you hear that corn or cotton are at multiyear highs as they were recently this is where you should have been invested before that happened.

Description:
The PowerShares DB Agriculture Fund (Fund) is based on the DBIQ Diversified Agriculture Index Excess Return (Index) and managed by DB Commodity Services LLC. The Index is a rules-based index composed of futures contracts on some of the most liquid and widely traded agricultural commodities. The Index is intended to reflect the performance of the agricultural sector.

Link to ETF description: DBA Description

This ETF is optionable and has LEAPS.

Buy PS Agriculture Commodity Fund, symbol DBA, currently $34.97

Chart of DBA


SLV - iShares Silver Trust

The SLV ETF is a physical metal ETF. As of February the trust owned 342,931,017 ounces of silver. The value of the SLV ETF is directly proportional to the price of silver on the open market. On a recent market day the spot price of silver was $33.70 and the SLV ETF was $33.10.

Silver is the poor mans gold. Silver has taken a backseat to gold for decades and is just now catching up to the $1400 price of gold. Analysts tell us that the historical value relationship between gold and silver would be equal to $105 silver at $1400 gold.

Silver has a growing number of uses in the nigh number of electronic components produced today. Silver supply is barely keeping up with demand and the growing pace of economic recovery is going to push prices higher.

Add in the expected rise in inflation in 2012 and dollar denominated silver should continue to rise.

Can't afford to own gold? Silver is an option and the silver ETF is the way to control a lot of it.

Description:
The objective of the iShares Silver Trust is for the value of the shares of the iShares Silver Trust to reflect, at any given time, the price of silver owned by the iShares Silver Trust at that time.

Link to ETF description: SLV Description

This ETF is optionable and has LEAPS.

Buy iShares Silver Trust, symbol SLV, currently $33.11

Chart of SLV


GLTR - ETFS Physical Precious Metals

ETFS Securities has built an ETF for all four precious metals in one ETF. The underlying trust holds gold, silver, platinum and palladium. Each of these metals has its own use with demand rising and they are dollar denominated. Platinum and palladium are used in manufacturing and demand is rapidly accelerating.

With this ETF you don't have to pick the right metal for an investment because this allows you to own all four. If supplies of palladium suddenly go short you profit from the rally. As dollars get cheaper all four metals will rise. Because of the combination of the four metals this may be the best inflation hedge of the entire ETF list.

Description:
ETFS Physical Precious Metals Basket Shares (“the Shares”) are issued by ETFS Precious Metals Basket Trust (“the Trust”). The investment objective of the Trust, Symbol: GLTR is for the Shares to reflect the performance of the price of gold, silver, platinum and palladium bullion, less the expenses of the Trust’s operations. The Shares are designed for investors who want a cost-effective and convenient way to invest in precious metals.

Link to ETF description: GLTR Description

This ETF is NOT optionable (yet).

Buy ETFS Precious Metals, symbol GLTR, currently $91.46

Chart of GLTR


ITB - iShares Dow Jones US Home Construction

The home construction ETF includes all the major U.S. builders as well as companies like Home Depot, Lowe's, Sherwin Williams, Owens Corning and Ethan Allen. This is a sector fund compared to just a dozen builders. When the new home buying binge kicks in later this year or early 2012 this ETF should rocket higher. It is so beat up today it is only a few dollars off its 2009 lows. The recent seasonal decline in builder sentiment knocked it back to $13 but it could eventually climb back into the $40s when the pent up buying begins.

There is a lot of pent up buying on the sidelines. It will take a while for it to appear because of the weakness in the jobs market and the problems getting loans for a new home. These problems will eventually improve. Unlike some of the other ETFs on this page this one may take a while to ferment but I still believe it will be very profitable.

On the plus side it is cheap and optionable.

Description:
The iShares Dow Jones U.S. Home Construction Index Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Dow Jones U.S. Select Home Construction Index.

Link to ETF description: ITB Description

This ETF is optionable but no LEAPS.

Buy iShares Home Construction ETF, symbol ITB, currently $13.35

Chart of ITB