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ETFs That Will Haunt Your Portfolio (If You Do Not Buy Them)

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As we quickly approach Halloween, markets are looking downright terrifying. Many stocks are displaying gruesome earnings, while some regions of the world, like Europe, are a mere skeleton of their former selves, threatening to bring global economic growth down with them.

If that wasn’t enough, we still have election uncertainty and the fiscal cliff to haunt the investing landscape, while many top emerging markets are no safe haven either. In fact, Chinese GDP growth grew at just 7.4% for the third quarter, marking the slowest rate of growth since Q1 2009, suggesting that investors may have to look elsewhere to power their portfolios.

Yet even with this doom and gloom, there are several sector segments and individual nations that still look promising as we close out the year. An easy way to take a look at the market from a sector perceptive and drill down into the top performing industries is via the Zacks ETF Rank (read Protect Your Portfolio with These Insurance ETFs).

This new ranking system provides investors with a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style, or asset class. This proprietary method also takes into account risk preferences of investors in order to help identify ETFs that are most in line with one’s volatility tolerance.

The overall goal of the ranking process is to select the best ETFs within each risk bucket, assigning ETFs one of five ranks within each risk category. So, the Zacks ETF Rank reflects the expected return of an ETF relative to other funds with a similar focus and level of risk (read Zacks Top Ranked Financial ETF: Star in Q3 Earnings).  

By using this approach, investors can avoid the ghastly ETFs that are out in the market, and focus in on ones that look likely to outperform over the next few months. For investors seeking to apply this approach to their own investments, we have highlighted three ETFs below that are scary good, and could haunt a portfolio for years to come if one were to miss out on their immense potential:

Vanguard Dividend Appreciation ETF (VIG - Free Report)

Although many stocks have seen frightful performances as of late, those that are dividend achievers have been more or less immune from the market’s tricks. That is because firms that qualify for this status have been raising dividends, every year, for at least the past 10 consecutive years.

This makes them bastions of stability in this uncertain world, and also stocks that generally have less volatility than others in the marketplace. VIG follows a benchmark of these securities, holding just over 130 stocks in total in its basket (read the Guide to 10 Great ETFs Yielding 7% or More).

Exposure is focused in on the U.S. market, with the vast majority coming in the large cap segment. In terms of sectors, consumer staples, industrials, and consumer discretionary take the top three spots and combined account for just over 60% of assets.

The annual dividend beats out the S&P 500 by about 20 basis points while the product is also less volatile than the broad benchmark, making it ideal for investors looking for dividend safety and price stability. Thanks to this and the fund’s ultra-low expense ratio along with its tight bid ask spread, the fund receives a Zacks ETF Rank of 1 or ‘Strong Buy’ with a Risk Rating of ‘Low’.

PowerShares S&P SmallCap Health Care Portfolio (PSCH - Free Report)

While none of the stocks in this health care ETF have a cure for zombies, they could be the antidote to a sickly portfolio. That is because small caps in the health care space often do not suffer from the same patent cliff issues that their large cap counterparts are facing.

This makes them prime takeover targets for those in the large cap pharma space as these firms grow increasingly desperate for new drugs, and revenues, to beef up their prices. While investors can obviously play this trend from a single stock approach, a broader ETF approach could be the way to go in order to spread risk around in case any one firm runs into some trouble (read Could The Small Cap Healthcare ETF Be a Great Pick?).

One easy way to do this is via PSCH, a diversified health care ETF that holds just over 65 names and charges investors a low 29 basis points in fees. The product is well split between micro caps and small caps, while it also offers a nice breakdown among the various subsectors of the health care market, ensuring that no one segment drives the risk/return of the fund.

Thanks to this diversification and the potential tailwinds for the small cap health care sector, this ETF ranks favorably with our system. The product currently has a Zacks ETF Rank of 1 or ‘Strong Buy’ with a Risk Rating of ‘Medium’, due to its potentially higher volatility levels.

iShares MSCI Thailand Investable Market Index Fund (THD - Free Report)

While people in Thailand might not observe Halloween, their country’s stock market performance has certainly been worth celebrating this year.  This solid return is even more impressive considering the horrific flood to close out 2011, in which the nation suffered through what some believe is one of the costliest disasters in modern history.

Thailand quickly persevered over this tragedy and resumed its strong growth, along with the rest of Southeast Asia, in much of 2012. The central bank now expects the country to grow at roughly 5.7% this year, but still cut rates in the most recent meeting as ‘insurance’ to protect the domestic recovery against global shocks.

With this resiliency and proactive policies by the country’s central bank, it is easy to see why the Thai ETF has been a solid performer this year, adding a solid 22% YTD. The fund also pays out a pretty good 1.9% in 30-Day SEC yield terms, although fees are at 59 basis points a year (read Is The Thailand ETF Unstoppable?).

From an exposure perspective, the ETF does concentrate itself in large caps, holding 84 stocks in total. Taking a sector look, financials, energy, and materials dominate, accounting for over two-thirds of assets.

Still, in the trailing one year period, the fund has crushed many other emerging markets, adding over 33% in the period, beating out broad developing nation benchmarks by a pretty wide margin in the time frame.

Given this history of outperformance and strong outlook in the near term, it should be clear why THD also has a Zacks ETF Rank of 1 or ‘Strong Buy’, making it another excellent choice for investors seeking less frightful markets to finish out the year.

Follow @Eric Dutram on Twitter

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