Advisor says corporate bonds still have legs, but currency ETFs are not one of his favorites for the new year.

“Big Joe” Clark has his wish list for 2009. And it includes some exchange-traded funds that even Santa Claus might find useful as stocking stuffers.

At the top are corporate bonds. In the coming year, the Anderson, Ind.-based advisor is expecting investment-grade corporates and high yield debt markets to perform like stocks do in more-normal times.

As a result, Clark is buying more of the iShares iBoxx Investment Grade Corporate Bond Index (NYSE: LQD) in client portfolios. It’s a fund he held during the latter half of 2008.

At the same time, Clark is initiating new positions in the iShares iBoxx High Yield Corporate Bond Index (NYSE: HYG).

“Both are moving up in terms of prices,” he said. “That means their yields are dropping some. But they’re still yielding much better than Treasuries and very attractively priced.”

The longer-term government bond market is at all-time lows in terms of yields, adds Clark. For example, the iShares Barclays 20+ Year Treasury Bond Index (NYSE: TLT) was paying interest of around 3.41% heading into Friday.

Rallying Bonds 

“Corporate bonds were sold off as an absolute sense of fear overtook the market. The economy is going to face continuing challenges in the coming year. But default rates aren’t going to go over a cliff,” said Clark.

So ETFs like LQD and HYG remain undervalued, despite a 20% rally in prices since the end of November, he says. “There are still legs on the corporate bond rally,” said Clark. “The [yield] spread between Treasuries and investment-grade corporates has to go lower. Treasuries just can’t go much lower.”

Even though HYG falls into the junk bond category, he believes corporate balance sheets remain relatively healthy. And he points out that many companies issuing junk bonds are flush with cash on their books.

“When credit markets are this out of whack, yields are so low that companies can take debt off their books and refinance those bills at the lowest recorded rates in history,” said Clark. “The reality is that opportunity exists to improve corporate balance sheets as long as Treasuries remain at relatively low rates.”

Stock ETFs are another matter, he says. “These are very volatile times. The opportunity to get crunched still looms very large over the market moving into 2009,” said Clark.

But he’s optimistic about foreign ETFs. Clark has moved into the iShares FTSE/Xinhua China 25 Index (NYSE: FXI).

“It found some technical footing a few weeks ago. That makes us feel a little better about this ETF,” said Clark.

His firm originally got out of FXI in November 2007 on concerns that China had overspent preparing for the 2008 Summer Olympics. “A number of bad things took place in that country in 2008, from earthquakes to a declining economy,” said Clark.

But in early December, FXI broke above its 50-day moving average. That’s a key short-term technical price indicator.

“While we’re seeing commodity prices still getting hit across the board, China has the cash reserves to take advantage of the situation,” said Clark. “They’ve been able to buy everything they need in terms of raw materials—and horde a little—at fantastic prices.”

And China also is a big holder of U.S. Treasuries, he points out. “So they’ve been able to benefit from the huge rally in Treasury prices,” Clark said. “Taken along with its strong cash reserves, China is just in a tremendous competitive position as a player in global markets.”

He isn’t quite ready to jump into Telecom sector plays yet. But Clark says on his radar are the iShares Dow Jones U.S. Telecom Index (NYSE: IYZ) and the Vanguard Telecom Services ETF (NYSE: VOX).

“When bond yields come down, Telecom has done well in the past,” said Clark. “Telecommunications is a highly leveraged industry. So falling corporate bond yields should benefit those ETFs.”

From Luxury To Staple 

The overall economy in the U.S. will be challenged in 2009, he adds. “People just aren’t going to give up their ability to use cell phones. The ability to communicate on the go has turned from a luxury to a need. We think Telecom is going to resemble a Consumer Staple as the corporate bond yields come down,” Clark said.

He also views Europe as taking longer to rebound than the U.S. “Italy’s debt just climbed to 104% of GDP, which is spooky. At the same time, the U.S. is at 72.5%, even after all of the troubles we’ve had over here,” said Clark.

With diverse economic profiles, he believes operating under a single currency also won’t help Europe’s attempts to quickly rebound. “The euro was clearly on a downturn, but a few weeks ago that trend reversed,” said Clark. “But the cat’s out of the bag about the U.S. printing money. So at some point, the U.S. dollar should go back down and the euro should start going back up.”

But currency ETFs and portfolios heavy with European companies aren’t on his list of favorites for 2009. Trying to time currency moves and figure out how quickly European stocks rebound are going to be difficult decisions to make over the next several quarters, says Clark.

And while a credit crisis in the U.S. is showing signs of abating, he cautions that markets remain in an extreme case of flux heading into a new year.

“You can start to see the sunrise, but it’s clearly not bright outside yet,” said Clark.

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