3 Reasons to Buy Stock ETFs on Smaller Dips

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Increasingly, investors have been asking that I put more cash to work. This includes new clients that have been sitting on the sidelines. It also includes current clients that are depositing checks from their banks into their brokerage accounts.

Guarded optimism and restrained greed have returned. It’s not the kind of euphoria that… if experience serves… tends to accompany the end of bull markets. Nevertheless, the new-found enthusiasm is coming as global stock assets are hitting 2-year highs. In some emerging markets, in fact, prices are logging all-time record peaks.

In this environment, there are those who are hoping for a 5%-10% correction here in November. They’re hoping that excessive bullishness and 10 weeks of vertical movement will give them a better “buying opportunity.” The problem is… they may not get it.

Here are 3 reasons to buy 2%-3% dips for the ETFs on your Buy List:

1. Treasury Yields Are Much Lower than They Were 7 Months Ago. When U.S. stocks hit their April 2010 highs, the 10-year treasury note was near 4.0%. Today, it is near a ridiculously low and historically undesirable 2.5%. Money will continue to leave treasuries for higher-yielding bonds, preferred shares, partnerships and yes… stock assets. The quest for higher yield may begin with ETFs such as Vanguard Dividend Appreciation (VIG), Vanguard High Yield Dividend (VYM), as well as dividend-based index trackers like WisdomTree Emerging Markets Equity Income (DEM).

2. Price-to-Earnings Valuations Are Much Better Than They Were 7 Months Earlier. Consider the simple reality that stocks are at roughly the same place that they were in April. In the 7 months that followed… through a substantive stock correction and an economic soft patch… corporate growth was vibrant; more than 3/4 companies beat top-line revenue and bottom-line profit expectations repeatedly. In other words, the P is roughly the same whereas the E is much higher, making stocks more fundamentally attractive. This holds true for the Dow Diamond Trust (DIA) with a low 14.5 trailing P/E as well as Claymore Guggenheim Frontier Markets (FRN) with a published 11.0 trailing P/E.

3. The U.S. Government Will Temporarily Extend All of the Bush Tax Cuts. You can worry that the lame-duck Congress will get nothing done on tax policy, either because it’ll be too difficult for leaders to compromise or because of the complexities involved in a compromise. Yet President Obama is likely to punt the football, agreeing to a simple, temporary extension for 2 years. With everything in 2010 being the same for 2011 and 2012, particularly cap gain and dividend tax rates, stockholders will feel no pressure to sell before the end of the year. Less sellers, more buyers… look for SPDR S&P Dividend (SDY) and SPDR Select Utilities (XLU) to benefit.

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