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Use
ETFs to Spot Market Trends Early
The overall market has been strong and biotechnology companies,
homebuilders, and semiconductors stocks are leading the way. That is
important information because many experts advise that making money in
the stock market is more about being in the right place at the right
time, rather than about being a great stock picker.
You can find out which industries and hot and equally important, which
are cold, by checking readily available exchange-traded-funds (ETFs)
performance reports. In fact, you can use these reports to detect major
market trends in the beginning stages.
As you may know, exchange-traded funds are similar to index mutual funds
in that the replicate the returns of predefined stock indexes. However,
unlike mutual funds, ETFs trade just like stocks.
Interest in ETFs has soared in recent years, and the industry responded
by creating funds to track just about every conceivable index. You can
find ETFs that track value stocks, Russian stocks, oil stocks,
healthcare stocks, insurance companies—you name it.
Performance Reports Tell All
You can download free reports from both Morningstar and MSN Money
that list all ETFs, including their total returns (price appreciation
plus dividends) for periods ranging from one week to five years on MSN
Money and from one month to three years on Morningstar. You can sort the
lists based on ETF names, category, or on return data.
By sorting the ETFs based on returns, and by observing the category of
ETFs at the top and bottom of the list, you can easily spot market
trends, whether they involve industries, types of stocks (e.g. value,
growth, or large-cap), countries, or whatever.
For instance, the biotech, homebuilding and semiconductor industries
that I mentioned earlier were the leading industries based on one-month
returns.
Taking a slightly longer view, over the past three months, coal-mining
stocks, financial stocks, and solar energy stocks led the list.
By studying both the one-month and three month returns, you can
determine which market segments are heating up, and which are cooling
off.
You don’t have to limit your analysis to industries. You can use the
same reports to find out which countries are hot (currently China and
India), or even which types of stocks are performing the best (currently
preferred stocks and value-priced stocks).
Finding the Reports
Find the ETF performance report from Morningstar’s homepage (www.morningstar.com)
by selecting
ETFs, then
ETF Performance Table, and finally the “Show Complete list” option.
You can sort the list on the contents of any column by clicking on the
column heading (click the heading a second time to sort the list in
reverse order).
On MSN Money (moneycentral.msn.com),
select
Investing, then
ETFs, then “Top
Performers,” and finally, click on “Show
All.”
Ignore Special Purpose Funds
When checking the lists, ignore ETFs with names starting with
“Ultra,” “Direxion,” or “Rydex 2x,” such as such as “Ultra Oil & Gas,”
“Direxion Daily Financial,” or Rydex 2x S&P 500.” These are special
types of ETFs that attempt to double or triple the returns of their
index, in both directions, up and down. Including them would distort the
results. Same thing for funds with "short" in the
name, signaling that they attempt to move opposite to the industry or
sector tracked.
Taking Action
Once you’ve identified an industry or other market segment of
interest, you could identify individual stocks in the segment by
checking the ETF portfolio or you could simply buy the ETF. You could
also buy a managed mutual fund targeting the market segment. In theory,
a managed fund should outperform an ETF that tracks a fixed list of
stocks. The evidence is mixed as to whether that happens in practice.
Also, some funds charge penalty fees if you don’t hold them for a
specified minimum time, which inhibits your flexibility when a formerly
hot market segment cools off.
published 8/2/09 |
