A New ETF Playbook

What will become of stocks over the course of 2009? And how about the faltering U.S. economy? Is the housing market done correcting? Where are the attractive yields in this low interest-rate environment? These are among the most pressing financial questions we face right now.

While financial predictions by Wall Street’s forecasters may vary somewhere between haunting to jubilant, it’s impossible to know if any of them are right. Yet one thing you can do is to check your investment playbook to make sure you’re using the right strategy for the right game (or market environment). I’ve listed seven potential scenarios for 2009 and the best way to play them using ETFs.

Reduced Spending Play

As 2008 holiday retail sales showed, companies in the consumer discretionary sector — like Best Buy, Home Depot, Ford Motor and Coach — are all feeling the pinch of reduced consumer spending. Unfortunately for retailers, putting up a sign that states “50% Off” isn’t coaxing consumers into buying stuff. A weak job market coupled with frail home prices continues to dampen consumers’ appetite to shop and spend money. But not all consumer sectors will fare poorly.

The Consumer Staples SPDR (XLP) contains defensive stocks like Proctor & Gamble, General Mills and Kraft Foods. This was also the best performing S&P 500 sector last year. Its staples are companies that can still churn out profits even during difficult times. Other defensive industry SPDRs are Utilities (XLU) and Health Care (XLV). Even during times of tight spending, people still need electricity and gas along with medical care.

Rebuilding Infrastructure Play

As you may have noticed, Barack Obama isn’t shy about his ambitious plans to revive the ailing U.S. economy. Among his boldest plans is to revitalize America’s decrepit roads, highways, schools and public structures with upwards of $1 trillion in government spending. All of these major reconstruction plans will require a few things: commodities, manual labor and lots of machinery.

Companies involved in engineering, construction equipment, cement manufacturing, mining and steel are likely to be key beneficiaries of any infrastructure legislation that gets passed into law. The Market Vectors Steel ETF (SLX), SPDRs Metals & Mining (XME) and the Industrial Select Sector SPDR (XLI) are funds that could get a positive jolt. Another fund to watch is the First Trust ISE Global Engineering and Construction ETF (FLM).

Rebounding Commodities Play

For the first half of 2008 those who listened to Jim Rogers and bought commodities were geniuses. During the second half of the year, they looked dumb. After hitting an all-time high of $147.27 on July 11th, 2008, the barrel price of crude oil reversed course and subsequently fell out of the sky. (I privately wonder if foreclosures on the palaces of oil sheiks are the next shoe to drop in the real estate market.)

If you believe that commodity prices will indeed rebound, look at diversified funds like the iShares S&P GSCI Commodity Index Trust (GSG) or the PowerShares DB Commodity Index Tracking Fund (DBC). By using futures contracts, each of these products contains exposure to crude oil, heating oil, corn, gold and wheat. Sticking with a diversified commodity ETF will also relieve you from the difficulty of trying to guess which particular commodity will take off. If you’re especially aggressive about playing a repeat boom in commodities, see the ProShares Ultra DJ-AIG Commodity ETF (UCD). The fund attempts to double the daily upside performance of commodities. It’s also a much safer bet, from a credit risk perspective, than ETNs with similar strategies.

Fiscal Instability Play