Pharmaceuticals and emerging markets offer some opportunity for investors wanting to capture the upside of volatile market conditions, says Matt McCall. He also advises MoneyShow’s Kate Stalter to keep an eye on an ETF that invests in European big caps, because you’ll want to grab gains when that big investors jump back into that region.

Kate Stalter: We are speaking today with Matt McCall. He is the CEO of Penn Financial Group and also an author and newsletter publisher of the topic of ETFs. Give us some of your take on the current ETF situation, and what you believe investors should be looking at in that regard these days.

Matt McCall: With the market being extremely volatile and leaning toward the downtrend right now, most ETFs that are related to equities by any means are basically pulled down with the overall market selling.

There are several statistics that have come out in the last week showing that basically all the big stocks, whether it be in the large caps or small caps, the more heavily traded names have all been drifting lower together. So that is showing me that there are not a lot of safe havens out there right now in stocks, or more specifically in ETFs. Because, of course, most ETFs are made up of stocks.

The only real place I see people actually hiding out has been in fixed income, whether it be government bonds, municipal bonds, even some corporate bonds. As far as ETFs are concerned, the problem is with yields falling to levels we have not seen in years. In the case of the US government ten-year bond, it may be a little long in the tooth for the rally in the bond market.

So in my mind, I think we have to start looking and building what I call a wish list for ETFs out there that invest in stocks when the time is right.

Kate Stalter: Are there any that are catching your attention right now as possible wish list candidates?

Matt McCall: Well, I think you have to look at it in one of two ways. For investors who want to take the more cautious approach, I think the pharmaceuticals look really good right now.

There’s the iShares Dow Jones Pharmaceuticals ETF (IHE). That has held up much better than the overall market. It’s still dragged down from the high that we hit earlier this year, but they have held up really well and a lot of the drug companies pay some nice dividends, so you get a nice yield coming along with this ETF.

You have that bit of safety, where typically it is not going to have volatility of the overall market, so you don’t have the big daily swings. That’s one way to look if you want to get some exposure to the market, not taking on the big volatility.

But I do look to the emerging markets as well. If you want to be a little more risky, I think the emerging markets, based on the valuation standpoint, are more attractive than both Western Europe and the United States, and from a growth standpoint, as well.

You are going to get better growth out of the emerging markets. So if you just want to go as a whole, invest in emerging markets, there is the iShares Emerging Markets ETF (EEM), which is the real big one.

Kate Stalter: What about some areas that you would caution investors to stay away from at the moment?

Matt McCall: Well the two big ones probably that everybody is going to be talking about are Europe and the financials. That being said, though, when everybody is leaning one way and everybody is talking either very bullish or bearish on one sector, typically we are going to be close to the end of that current trend.

So there is going to come a point—just looking today actually, Greece is down 50% in the last six months. Greek stocks aren’t going to zero. I don’t ever recommend trying to catch a flying knife or pick a bottom, but I think you have to look at some of these sectors at some point in the future, whether it be two days, two weeks, or two months from now, I am not quite sure of the timing.

Stay away from both those sectors at this point, but there will be a time that you are going to have great value and everybody is gone, the sellers have been flushed out and then you have a valuation, a buying opportunity that you see every ten years or so.

It’s similar to what we had seen two years ago in March of 2009 in the market. We will have that similar buying opportunity, I believe, for the financials and for European stocks in the next probably two to three months, I believe.

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Kate Stalter: How would you suggest investors approach that, via individual stocks, via ETFs, or both?

Matt McCall: As far as playing Europe, I would definitely go toward an ETF versus individual stocks. Because most stocks have been pulled down, so I think the entire sector will rise when we do see this turnaround come, or even a long-term dead-cat bounce from levels that are very attractive.

I would look at the iShares S&P Europe 350 ETF (IEV). This invests in 350 large-cap European stocks. There are a lot of financials in there and a lot of other big-name stocks that have just been dragged down with the selling that is still holding up well, but they get sold with everything else. So that is hitting a year low now. That can continue even lower.

They say stocks and ETFs can be cheap, but they can always get cheaper. At this point I do not recommend jumping in there, but I want to put it on a watch list and keep an eye on it.

It may be 5% lower or 10% lower, we don’t know. Just look for an area where we build a base and we start moving higher. Never try to pick the bottom, but I think there will be an opportunity at some point.

Kate Stalter: One last question for you Matt...what would be your words of wisdom for investors wanting to reevaluate their long-term strategy?

Matt McCall: Well that is a very dicey question, because first of all it depends on who you are. If you are 65 years old, your long-term strategy is going to be different than somebody who is 35 years old.

So you should already, at 65, be close to retirement. You shouldn’t really have that much exposure to equities already, so you should be holding up much better in this market than the overall market itself.

One thing I do caution, and a lot of investors make this mistake, and I think it is probably the biggest mistake investors make and why most individual investors who do it themselves can’t beat the market or even keep up with the market: They make emotional decisions, and they base those long-term decisions that you just mentioned, their long-term plan, on short-term fluctuations in the market.

So for example, you are basing your investing for the next 20 years on what is going on with a Greek bank or the news coming out on a Monday and a Tuesday, so you change your entire dynamic of your long-term strategy based on one Greek bank coming out with some news.

That may sound good, and it may look smart for two or three days or even for a week or so, but really in the long run, you can’t do that because you are investing in earnings and profits. You are investing in long-term themes, you are investing in countries, and you are investing in a strategy that the US market will be higher ten years from now.

So I think you have to take that very cautious approach with changing your long term. Should you have stop-losses to get out of positions? Absolutely, and if you are not comfortable with the market, get out, yes.

But I do not believe in changing your long-term strategy based on some short-term fluctuations. People who did that, unfortunately, were the ones that sold near the bottom in 2008 and 2009, and they are still the ones trying to get back in when the market is 70% or 80% higher than where we were.