By Investor's Business Daily,  December 26, 2013

Best U.S. ETFs

1. Neena Mishra, director of ETF Research at Zacks Investment Research in Chicago, Ill.

U.S. stocks had an excellent performance during 2013. I expect 2014 to be another good year for stocks, though it will probably not be as spectacular as this year.

There is no doubt that quantitative easing has been a major force behind the market's rally this year but the start of tapering signals that the economy is now strong enough to withstand the gradual withdrawal of the Federal Reserve's support.

A healing labor market, improving housing market, lower energy prices and still very accommodative monetary policy are expected to further support the market, while the fiscal uncertainty continues to pose some head winds.

At current levels stocks are not cheap, but they are not expensive either, specially compared with most other asset classes. Further, corporate earnings will grow as the economy improves further.

A gradual rise in interest rates is good for stocks in general, but some sectors will do better than others. Industrials and technology are among the sectors that do well when the economy grows, and on the other hand, rate-sensitive sectors will be hurt.

Also, once the QE begins to fade away, investors will turn their focus on fundamentals and only the "better" or "high-quality" stocks will shine. Academic research shows that high-quality companies consistently deliver better risk-adjusted returns than the broader market over the long term.

My pick for 2014 is iShares MSCI U.S.Quality Factor (QUAL). QUAL identifies high-quality stocks on the basis of three main fundamental variables: high return on equity, stable year-over-year earnings growth and low financial leverage.

Apple (AAPL),Google (GOOG) andJohnson & Johnson (JNJ) are the top three holdings of the fund, while technology takes about 40% of the asset base.

I like the ETF's focus on larger, stable, cash-rich companies in industries that typically perform well in the higher-growth environment. With the economic growth picking up in the eurozone, Japan and China, large-cap companies that derive almost half of their revenue from the outside of the U.S., may perform well. They also look attractive compared with the small-cap companies on a valuation basis. However, they may underperform if investors continue to favor high-beta, domestically focused stocks.

2. Joe Barrato, CEO of Arrow Investment Advisors in Olney, Md., with $621.3 million in AUM.

With Fed tapering on the horizon, interest-rate risk will continue to challenge investors to seek alternative sources of income, with the search for yield remaining a driving theme in 2014. Since roughly two-thirds of fixed-income issuance occurs outside the U.S., we believe a global approach to fixed income makes sense for purposes of yield, return opportunities and diversification.

We also see improving global growth next year, which may benefit international equities, particularly in developed countries where valuations and fundamentals remain relatively attractive.

Concerns over rising interest rates have led some investors to reduce the duration of their fixed-income holdings in an attempt to reduce volatility. One approach is to take duration out of the equation by looking for alternatives to traditional bond investments. With interest rates at or near an all-time low, investors' fears about rising interest rates are justifiable, making a multi-asset approach to yield attractive next year.

As such, we continue to talk with investors about Arrow Dow Jones Global Yield (GYLD), which offers a competitive yield (30-day SEC yield of 6.04% and distribution yield of 7.22% as of Dec. 17) along with multiasset exposure to potential growth opportunities on a global scale. In addition to global equity exposure, GYLD provides equal weight exposure to global sovereign debt, global corporate debt, global alternatives such as master limited partnerships (MLPs) and global real estate.