Weekly Update

A strong start to the week was followed by an across-the-board sell-off driven by a disappointing jobs report, leading the Dow to actually fall into negative territory (-0.8%) for the year. While the jobs report certainly dragged down equity markets, Europe is the true albatross that could drown economies from China to the U.S., and unless European leaders develop a plan that mollifies economists, traders, and investors, expect the current level of volatility to continue.

At this moment in the 2012 investment cycle, safety should be our primary objective. Cash equivalents are the only true sanctuary today, and it is time to consider money market funds or bank CDs. Your brokerage firm probably has access to a variety of FDIC insured CDs offered by a number of banks throughout the country. Bond yields are exceptionally low, which places fixed income at a higher-than-average risk level, compelling me to recommend investing only in short to intermediate term bond funds. Check out the Pimco Total Return  ETF (BOND) run by Bill Gross. On the equity side, consider focusing on high dividend-paying funds/stocks.

The iShares Select Dividend ETF (DVY), highlighted repeatedly in updates over the past year, did not perform as well as I expected last week. DVY lost 2% for the week, compared to the Dow Jones Industrial Average ETF (DIA), which lost over 2.6%.  DVY’s recent ineffectiveness has led me to analyze other funds in the dividend space.

The one fund that stands out is the First Trust Morningstar Dividend Leaders (FDL). The manager has successfully limited losses while generating excellent upside performance over the past three years. Lifting the hood on the fund reveals the differences between FDL and DVY:

If you expect the bulls to take over, DVY is probably the preferred choice, since the fund has a history of generating 90% of market returns with less risk than the Dow or S&P. However, since a high level of volatility is expected to persist, I will be migrating to the less volatile FDL.

Note that over the last month, FDL lost 2.49%, or 29% of the 8.69% loss in DIA, which is very consistent with the FDL’s three-year history. The exhibit below compares four large-cap dividend ETFs, as well as the DIA. HDV and SPLV have both performed well for the last one-year period, but I prefer funds with a three-year minimum track record. I suggest you have your broker/advisor provide you with a comparison of your current holdings to other similar options by investment category.

Data source: Morningstar

*Fund inception date: 3/29/11

** Fund inception date: 5/5/11

Considering markets are inclined to overreact to dominant news stories, I would not be shocked to see equities rebound at some point during the week, giving you the opportunity to raise additional cash at a more favorable price point. The pivotal domestic market mover this week will be the release of the Fed’s Beige Book, which describes the current state of the U.S. economy. Also, the report will likely include comments on Spain, Greece, and the overall gravity of the European debt crisis.