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Use ETFs to Spot What's Hot & What's Not

In my experience, making money in the market is more about being in the right market sector at the right time than it is about being a great stock analyst.

For instance, currently, biotech and clean energy, and stocks based in Brazil have been leading the market higher. Conversely, gaming, and copper and gold mining stocks have been the biggest losers.

Momentum style investors, a category that includes many hedge fund managers, regularly use this information when deciding where to allocate their cash. You can do the same thing by checking exchange-traded-funds (ETFs) performance reports, which are available on several financial websites.

Why Use ETFs?
As you probably know, ETFs are similar to index mutual funds in that they track the returns of predefined indexes. However, unlike mutual funds, ETFs trade just like stocks. As interest in ETFs has grown over the years, the industry has created indexes to track just about every conceivable market sector. For instance, you can find indexes that track specific industries such as homebuilders or social media stocks, commodities and precious metals prices such as the price of livestock, crude oil, or gold, stocks based in a specific country such as Russia or Germany, or a specific industry within a country such as China Consumer stocks, and on and on.

Free ETF Site
Here’s how you can use ETF Screen (www.ETFScreen.com), a free site, to find out “what’s hot” and “what’s not.” Using it is simple. Start by selecting Performance from the top menu. Then, in the “Include” menu, specify No for both Short Funds and Leveraged Funds, which are not relevant for our purposes. Leave the remaining selections unchanged.

By default, the site displays all tracked ETFs sorted by one-day returns, which is too short a time frame. Click on the downward pointing arrow below each column label to sort the list with top performing ETFs for that timeframe at the top. Click on the upward pointing arrow to sort with worst performers at the top. I used one-month returns for the examples that I gave earlier.

Trend Spotting
ext sort by the three-month returns column for a longer-term view. By comparing the one-month returns to the three-month returns, you can get a handle on which market segments are heating up, and which are cooling off.

For instance, when I checked, biotech, gold and silver miners, Brazilian stocks, China Internet stocks, and coffee prices dominated the three-month top performers list. Since, biotech stocks topped both the one-month and three-month lists; it looks like the biotech trend is still strong. However, although gold mining stocks were strong on the three-month list, they were near the bottom of the one-month list. That signals that the gold mining stocks have probably peaked.

Hedge funds use the information gleaned from this process to buy ETFs in strengthening sectors and sell-short those in weakening sectors. You could do the same, but that’s a risky game. Instead, try repeating this process a few times; say once a week. I’ll bet that you’ll find that you’ve gained a valuable perspective on overall market trends, which can help you make better investing decisions.

published 9/5/14

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