3 ETFs to Avoid Right Now

Amid all the volatility and uncertainty out there, a fair number of investors are probably feeling a bit dizzy. The market's daily gyrations are enough to give anyone motion sickness, the mess in Europe seems to be getting worse, and the U.S. economy is barely running in place. The market's next move is anybody's guess, but there are a few areas of the global economy that appear to be slightly more high-risk than others. That means folks should think twice before loading up on investments such as exchange-traded funds that focus exclusively on these areas.

Crisis brewing
While the fallout in Europe may in fact uncover a handful of bargains for intrepid stock investors, the fiscal problems brewing in the eurozone probably won't have any easy solutions. Major central banks around the world are making efforts to inject liquidity into the global financial system, but the crushing debt loads that countries like Greece and Italy are struggling with aren't going to go away. And given economic indicators that show the eurozone is almost certainly headed into recession, the turbulence here isn't over yet. Growth will likely be next to nothing in the region next year, even in a best-case scenario.

Given the spate of serious issues the eurozone is dealing with, investors should approach the region with caution, and avoid any serious overweighting. This means an exchange-traded fund like iShares MSCI EMU Index (NYS: EZU) , which focuses strictly on the European region, should get the cold shoulder from investors.

But at the same time, I don't recommend ditching your European exposure entirely. Long-term investors should still keep their toes in the water here, albeit in a more indirect fashion. Get your eurozone exposure via a diversified actively managed mutual fund or ETF that invests in developed markets beyond Europe, such as Schwab International Equity ETF (NYS: SCHF) or a more encompassing total-world index such as Vanguard Total International Stock Index ETF (NYS: VXUS) .

In the land of the dragon
China has certainly been the darling of emerging markets in recent years, with its growing population, red-hot growth, and equally hot investment returns. The SPDR S&P China ETF (NYS: GXC) posted an eye-popping 72.6% cumulative return from 2009-2010, compared to a mere 42% showing for the MSCI EAFE Index.

But even China's juggernaut economy is showing signs of strain. A recent flash PMI reading hints that manufacturing in China is actually contracting, China's real estate boom is showing signs of becoming a bust, and the Chinese government recently began monetary easing policies in an attempt to ward off a hard landing. These are ominous warning signs, making investment in China-centered funds like SPDR S&P China ETF a risky proposition right now.

Again, the key here is not to abandon exposure to China completely, but rather to approach global investing in a well-rounded and diversified manner. While I wouldn't recommend adding to your Chinese allocation in this environment, any investor should have some skin in the game here. So instead of buying China-focused funds, invest in a broad-market emerging markets fund like Vanguard MSCI Emerging Markets ETF (NYS: VWO) , which comes with a low 0.22% annual expense ratio.

Banking on trouble
Of course, the U.S. is not immune from the growing signs of a global economic slowdown. While domestic economic data in recent weeks has actually been fairly positive, the economy is still pretty weak. As a result, it wouldn't take much in the way of exogenous shocks to send our nation spiraling back into recession. Even if growth here remains relatively reasonable in the next quarter or so, if the eurozone crisis gets out of hand, there's not much the U.S. will be able to do to stop the contagion.

There's one area of the economy that could be especially vulnerable to a eurozone breakdown -- financials. While U.S. financial institutions are arguably less leveraged and in better shape than they were going into the crisis several years back, they are still at risk due to tightening credit conditions overseas and exposure to bad eurozone debt.

So ETFs like the Financial Select Sector SPDR (NYS: XLF) probably shouldn't be on your Christmas list this year. Big banks have been beaten down so hard, a good number of them may actually represent compelling buys -- I just don't know that now is the time to be making that bet. Instead, focus on stable, financially healthy blue-chip names that are in the best position to survive and even thrive if another global downturn does emerge. A fund like Vanguard Dividend Appreciation ETF (NYS: VIG) offers a wide array of market-leading large caps that pay out decent dividends -- a much better use for your money in these trying times.

Volatility and uncertainty can bring opportunity, but you have to know when to act on some opportunities and when to let others pass you by.

At the time thisarticle was published

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