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New
Tool Spots Market Trends
If you think the U.S. market is hot, Brazil is steaming.
When I checked last week, an index of Brazilian stocks had gained 38%
over the past three months and 61% over the past year. By contrast U.S.
stock returns, at least as measured by the S&P 500 index, were 11% and
22%, respectively, over the same periods.
But you don’t have to go to Brazil to find hot stocks. Steel industry
stocks, up 36% in three-months were almost as strong. Oil and gas
producers, up 33% in three months were also making shareholders happy.
I didn’t spend hours digging out this information. I found everything
that I’ve told you, and much more, by taking advantage of certain
features of readily available exchange-traded-funds performance reports.
In fact, you can use these reports to pick up on major market trends in
the beginning stages.
I’ll get into the details in a minute, but first some background.
ETFs Cover All Bases
Exchange-traded funds (ETFs) are similar to index mutual funds.
They attempt to replicate the returns of predefined stock indexes.
However, unlike regular mutual funds, ETFs trade just like stocks. You
can buy or sell them at any time during the trading day using any
stockbroker. You pay the same commissions as you would for trading
stocks.
Interest in ETFs has soared in recent years, and the industry has
responded by creating new funds to track just about every conceivable
index. When I checked last week, Morningstar listed 512 ETFs. Of those,
64 started trading within the past three months and 20 of them hadn’t
been around long enough to establish even a one-month track record.
It’s hard to imagine a market segment that isn’t represented by one or
more ETFs. Think gold prices are headed up? You have your choice of
three ETFs that track the price of that precious metal. Similar
situation for oil, silver, or commodities in general.
Whether you want small stocks, big stocks, value-priced stocks, growth
stocks, banks, insurance companies, healthcare stocks, Chinese stocks,
high-dividend paying European stocks, or South African stocks, you’ll
find an appropriate ETF.
ETF Reports: Unintended Use
My reason for focusing on ETFs is that both MSN Money and
Morningstar offer free reports intended to help investors evaluate ETFs
by listing certain features of each fund including total returns (stock
price appreciation plus dividends) for periods ranging from one-month to
three-years on Morningstar, and up to five-years on MSN Money.
The reports are indeed valuable for selecting individual ETFs, but as a
byproduct, MSN Money and Morningstar are also giving us a powerful tool
for analyzing stock market trends.
That comes about because both MSN Money and Morningstar allow you to
sort the complete list of ETFs based on any column listed including the
return data.
Spot Market Trends
By sorting the ETFs based on returns, and by observing the types
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, you might notice several ETFs tracking large-cap value
stock indexes near the top of the list alerting you that undervalued
large company stocks outperformed the overall market during your
selected timeframe.
Until recently, only institutional investors with giant computer systems
at their disposal could do such an analysis.
This is important 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.
Checking Returns
I sorted the ETFs based on three-month returns to come up with
the numbers for Brazilian, steel, and oil and gas producer stocks that I
mentioned at the beginning. Rounding out the three-month top-ten
returners were ETFs tracking Latin American (34%), basic materials
(33%), metals and mining (30%), oil services (29%), oil equipment (29%),
energy exploration (29%), and Mexican stocks (30%).
Taking a longer view, over the past year, Mexican stocks led the list
with a 71% return, followed by ETFs tracking stocks in Malaysia (64%),
Singapore (62%, and an overall Latin American index (62%). Next came
Brazil (61%,), two ETFs tracking Chinese stocks (55% and 48%), ETFs
tracking stocks in Germany (46%) and Spain (45%), and an ETF tracking 50
emerging market stocks that trade on U.S.
exchanges (44%).
You can’t assume that the last 12-months’ hot ETFs will continue to
outperform. It’s better to focus on recent returns, especially,
one-month, and three-months. That gives you a handle on which market
segments are heating up and which are cooling off.
When I sorted based on one-month returns, I found the top of the list
still dominated by emerging country, energy, and natural resource
stocks. However, an ETF tracking Internet stocks topped the list,
indicating that may be an up and coming sector worth watching.
MSN Money & Morningstar
You can find the ETF performance report from Morningstar’s
homepage (www.morningstar.com)
by selecting
ETFs, then clicking on the “View
complete list” link under the “Most Popular ETFs by Trading Volume”
heading. You can sort the list on the contents of any column by clicking
on the column heading.
On MSN Money (moneycentral.msn.com),
select
Investing, then
ETFs, then “Top
Performers,” and finally, click on “Show
All.”
One caveat: When checking the lists, I ignored ETFs with names starting
with “Ultra,” such as “Ultra Oil & Gas.” These are a special type of ETF
that attempts to double the returns of its index, in both directions, up
and down. Including them would distort the results.
I suggested using the MSN Money and Morningstar ETF performance reports
to help you spot stock market trends. However, exchange-traded-funds may
not be your best option for exploiting these trends. In many cases,
traditional managed mutual funds outperform ETFs, which mostly track
fixed indexes.
published 6/10/07 |
