Using ETFs to play Cramer's Outlook for 2012

 | Jan 10, 2012 | 9:30 AM EST  | Comments
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This piece originally appeared on ETF Profits.

Last week Jim Cramer summarized on TV his overall approach to investing in the first half of 2012. In general, he is looking at yield for 2012 with a focus on consumer stocks.

Cramer said that investors are looking for yield and that stocks with high dividend yields continue to look attractive with the Federal Reserve's announced plans to keep interest rates low until 2014. He also does not see any radical revisions to the tax code that would take away the advantaged 15% maximum Federal rate on dividends and tax them again at higher rates as ordinary income.

For exposure to high-yielding US equities, I favor the Vanguard High Dividend Yield ETF (VYM). There are more than a dozen U.S.-listed ETFs with varying methodologies that focus on dividend yield. But VYM has the greatest exposure to Cramer's favored stocks. VYM also has the lowest expense ratio of 18 basis points, which is less than half the average of its peer group. Low fees are important when looking for yield.

My favored ETF for exposure to the telecommunications sector is the Vanguard Telecommunication Services ETF (VOX).  VOX has the most exposure (23%) of its peers to AT&T (T), which is one of Cramer's favorite stocks. VOX also has a low relative expense ratio of 24 basis points.

For healthcare, I recommend the Health Care Select Sector SPDR (XLV) which has a large-cap focus because it only includes stocks within the S&P 500 Index. Compared to other ETFs tracking broader healthcare indexes, XLV has the most exposure (34%) in Cramer's three favored stocks, including 13% in Johnson & Johnson (JNJ), 12% in Pfizer (PFE) and 9% in Merck (MRK).

For a play on retail I like the Market Vectors Retail ETF (RTH). RTH was formerly known as the retail HOLDRS, which was a static granter trust. It was reconstituted in December into a more diversified ETF that tracks the Market Vectors U.S.-listed Retail 25 index of the 25 largest U.S.-listed retail companies. The SPDR Retail ETF (XRT) has greater size and liquidity, but its index uses an equal-weighting methodology that gives it a small cap focus. On the other hand, RTH now uses a modified market-cap weighting methodology that gives it significant exposure to Cramer's favored stocks, including 11% in Wal-Mart (WMT) and 7% in Home Depot (HD).

For aerospace and defense, I favor the iShares Dow Jones U.S. Aerospace & Defense Index Fund (ITA). ITA tracks the Dow Jones U.S. Select Aerospace & Defense Index of 34 stocks and has the greatest exposure to favored stocks, including 9% in United Technologies (UTX) and 8% in Boeing (BA). The other U.S.-listed ETF focused on this industry is the PowerShares Aerospace & Defense Portfolio (PPA), which follows a broader SPADE Defense Index that include companies that have just a portion of their business in defense and aerospace and less exposure to favored stocks. PPA also has a relatively high expense ratio of 66 basis points.

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