Please ensure Javascript is enabled for purposes of website accessibility

3 ETFs Poised to Win in Tomorrow's Market

By Brenda Johnson – Feb 3, 2014 at 1:40PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

ETFs are a great way to minimize risk while diversifying into new market areas. They can also represent a solid strategy for testing the waters in riskier areas such as biotech or foreign stocks. Here are three picks for future growth and income.

Exchange-traded funds (ETFs) have found their way solidly into this Fool's personal portfolio. These funds trade just like stocks but represent a basket of bonds, stocks, or currencies just like a mutual fund. Since ETFs have become popular, many new ETFs have been launched; this makes choosing the best ones really confusing. What's a Fool to do? 

United States Natural Gas Fund
The natural gas market has been highly volatile lately. We can likely expect the fluctuations to even out into some serious growth over the next ten years. Why? January data shows record withdrawals from natural gas stores,  which will invoke the laws of supply and demand on pricing, and in doing so will establish new usage patterns.  Natural gas industrial consumption is tracking power sector consumption in today's market, and by 2040, will be higher than power generation's consumption. Driving this growth is natural gas' new image as a clean, plentiful energy source, and the hard winter we have had so far. The typical natural gas stocks fluctuate quite a bit, and it is hard to pick the winning "horse." This makes going with a fund like the United States Natural Gas Fund (UNG -8.58%) a really good idea. 

The fund finished 17.9% higher last week and is at the highest level in two years. It appears to be going through a breakthrough at present. Obviously, the weather will warm up and the fund's price will reflect it, which could be a great time to buy. 

Taking a look at the long-term outlook for natural gas, you can see the expected market behavior:

From the chart above, it is clear that natural gas has been moving steadily forward from the low point it hit in 2012. That trend is expected to continue through 2020. Another hard winter may be rough, but it will certainly help the fund's investors. The top holdings for this fund are futures on natural gas prices.

Guggenheim Solar
Listed as one of the top funds of 2013, Guggenheim Solar (TAN 2.77%) promises to continue being a great choice through 2014 and beyond. After a tough 2012, this fund returned 135% in 2013. Some call solar energy the original clean energy source, and it is definitely a sector that is warming up. Guggenheim boasts a portfolio full of renewable solar energy stocks such as SolarCity, First Solar, and Canadian Solar.

By the sheer number of door-to-door canvassers and the number of my neighbors who have actually signed up, it appears that solar is the hottest thing since sliced bread.  It also fits into the category of a hot market sector with so many entrants that Fools could have issues trying to pick the right ones.  An ETF makes perfect sense. 

Guggenheim has a high beta at 2.55, but this is to be expected for a relatively new market area. Solar is on a very positive path forward; the latest reports often refer to it as a "solar gold rush." Driving the market forward are cheaper solar panel prices, rising traditional power prices, and increased solar efficiencies from the newer panels.

Guggenheim is currently trading at around $40. Even though the 52-week low is $15, this Fool recommends picking it up now as it is on an upward trend. From Bloomberg, here is dramatic evidence of how far the prices have fallen:

Source: Bloomberg

Vanguard REIT
Another wonderful market that investors love to hate is the real estate market. Though hot now, several years back it was as cold as the polar ice caps. Many investors are afraid that it will return to those frigid depths once again. Using a solid ETF to enter this market is a great way to reduce the risk, and the Vanguard REIT (VNQ -0.30%) fund pays a 4.2% dividend.   

This fund's top ten holdings are:

Source: U.S. News

The mix of REITs in the ETF includes health care, public storage, and residential equity. The resulting diversification minimizes risk while helping to ensure a good return. The obvious danger in REIT investment lies with changing interest rates, and no one really knows what they will do in 2014 yet. Fitch Ratings maintained a stable outlook for 2014 in spite of concerns, however, and it appears that in this case the slower economic recovery works in our favor. This outlook is consistent across all property types, but we can expect retirement and rest home properties to gain in favor due to aging baby boomers.  

In conclusion, natural gas, solar energy, and real estate are three scary yet potentially very profitable investment areas. A wise Fool will sleep better at night by investing in these areas through diversified ETFs, and these three appear to be stable picks for 2014 and beyond.

Brenda Johnson has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

United States Natural Gas Fund Stock Quote
United States Natural Gas Fund
$19.08 (-8.58%) $-1.79
Vanguard Specialized Funds - Vanguard Real Estate ETF Stock Quote
Vanguard Specialized Funds - Vanguard Real Estate ETF
$87.63 (-0.30%) $0.26
Invesco Solar ETF Stock Quote
Invesco Solar ETF
$83.76 (2.77%) $2.26

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.