Beating The Market In A Rocky Week

by on June 25, 2011 | ETFs Mentioned:

This past week was another rocky one for global markets as worries over Greece temporarily subsided in the middle of the week only to reappear in Friday trading. This resurgence came as a result of several members of Parliament declaring their intentions to vote against the austerity bill, leaving the measure uncertain to pass to say the least. Investors also focused on worries over Italian debt and banks in Italy as well; some are fearing that a credit downgrade is coming not only to the largest banks in the nation but to the country itself as well. Thanks to these fears over a contagion spreading to one of the world’s ten largest economies, many investors were running for cash before the bell to close out the week. To top things off, the Federal Reserve also met this past week, announcing an end to the QE2 program as anticipated at the end of the month. However, while Bernanke and Company didn’t feel the need for another round of QE, they did say that the economy is still very weak and that worries remain for the global economic picture. So with this Fed meeting and uncertainty over Europe it was an eventful week to say the least in the markets, potentially creating a very interesting period once trading begins on Monday.

Actionable ETF Trade Ideas

The actionable ETF ideas from Monday’s ETF Insider were based on both fundamental and technical indicators and were intended to play out over the course of the week. Two of the ideas managed to finish in the positives while our commodity pick was crushed by the IEA release on Thursday. Nevertheless, the average return of the three selections– which comes out to about 0.3% for the week– handily beat the S&P 500 for the same time period, as that benchmark lost 24 basis points since the start of the week. Below, we highlight some of the details from our picks on Monday and what went wrong and right from these selections. [sign up for a free ETFdb Pro trial to get actionable ETF ideas every week]:

Trade #1 Long XIV: Up 2.3%

Last Week’s Actionable ETF Ideas
Ticker Position Performance
XIV

Long

+2.3%
USO

Long

-2.2%
BKF

Short

+0.9%

Our bet against both contango and volatility proved to be a decent one this week as XIV crushed the S&P 500. Unfortunately, volatility spiked in the final half of the week, eliminating most of the gains that we saw from Tuesday and Monday. In fact, at one point during the week, XIV was up 10% from its start on Monday, giving investors who sold out at that time a huge windfall for two days of work. While XIV could continue to surge next week, we are hesitant to make another bet on this given the Greek vote and the end of QE2; there is really no telling how the market will react to these two important events.

Trade #2 Long JO: Down 7.3%

USO, an ETF representing crude oil futures, started off the week on a solid note as traders jumped back into the market in order to buy up oil after last week’s dip. At one point in Wednesday USO was up close to 2.3% from its Monday open, confirming our suspicions over the oil market. However, on Thursday, the IEA dropped a bomb that blew up our trade, revealing plans to pump 60 million barrels of oil into the economy from strategic reserves around the globe. As a result, oil prices fell by close to $5/bbl. in a matter of minutes, wiping out our gains for the week. Friday’s lackluster session didn’t help matters, leaving our position with a loss to close out the last week of June. We still think that this is a long term buy as the amount of oil that the IEA brought to market represents roughly 18 hours of global demand, creating a buying opportunity in crude for those who see this as another overreaction. While we agree with that assessment, we will be waiting on the sidelines for a bit in the crude market until things calm down a little and return to some sense of normalcy.

Trade #3 Short BKF: Up 0.9%

Thanks to continued worries over European debt and the American economy, many investors were too squeamish to invest in emerging market securities this week, giving traders who shorted this fund a nice gain for the week. Unlike our other picks, this fund was actually against us in the early part of the week but thanks to Bernanke’s gloomy comments on the economy BKF took a dive and never looked back, locking in a solid 87 basis point gain from the start of the week to the finish. We hesitate to continue this position into next week as well, giving all of the ongoing risks in the marketplace. With that being said, given how little this fund moved in light of positive comments from China, BKF could make a solid pick again next week for those with a higher risk tolerance.

New ETF Highlights

The past week was another busy one in terms of new ETF launches, further continuing the furious pace that the industry has seen in the first half of the year. In total, twelve new funds were launched by two issuers, highlighting huge expansions for both AdvisorShares and EGShares. The new funds from AdvisorShares focus in on active strategies while EGShares brings sector investing to emerging markets with its GEMS lineup [see the ETF Launch Center for updates on all new ETFs]:

ETF Launches

Below, we highlight some key details from the many ETFs that launched over the past five days:

Madrona Forward Domestic ETF (FWDD)

This product provides investors with an alternative to cap weighted benchmarks in the U.S. space, seeking to beat out the S&P 500 Index on a regular basis. The fund seeks to accomplish this by selecting a portfolio of up to 500 of the largest U.S. traded equities and, instead of weighting based on market cap, assigning weights based on the present value of future expected earnings relative to the share price. This could potentially offer investors a new way to play the large cap U.S. market, but the expense ratio may prohibit most, unless of course FWDD is able to consistently demonstrate alpha on a regular basis.

Madrona Forward International ETF (FWDI)

FWDI seeks to beat out the MSCI EAFE Index by selecting a portfolio composed of at least 250 ADRs. These Depository Receipts come from Europe, Australasia and the Far East, giving the fund a broad global focus. Unlike cap weighted funds, FWDI weights securities on the present value of future expected earnings, potentially giving investors another option when seeking international exposure in developed markets.

Madrona Forward Global Bond ETF (FWDB)

  • Launch: June 21
  • ETFdb Category: Total Bond Market
  • Structure: ETF
  • Expense Ratio: 0.95%

This fund seeks to beat the BarCap Aggregate Bond Index by investing in a broadly diversified portfolio of fixed income ETFs.  The fund looks to invest in at least 12 distinct bond classes across the globe, potentially providing investors a higher yield and lower volatility than other comparable bond funds.

Meidell Tactical Advantage ETF (MATH)

This actively-managed fund seeks to provide investors long-term capital appreciation and capital appreciation. MATH is structred as a ‘fund-of-funds’ that seeks to achieve its objective by maintaining a tactical strategy that can shift between bonds and equities in a short amount of time. The fund can move as much as 100% of its assets into fixed income or equities, or even cash, hopefully giving investors lower volatility returns.

EGShares Basic Materials GEMS ETF (LGEM)

  • Launch: June 23
  • ETFdb Category: Materials
  • Structure: ETF
  • Expense Ratio: 0.85%

This fund offers investors exposure to 30 of the largest materials companies that are based in emerging markets around the world. The highest weightings are given to firms in South Africa, Russia, and Brazil, while top individual holdings include; Vale, Norilsk Nickel Mining, and AngloGold Ashanti.

EGShares Consumer Goods GEMS ETF (GGEM)

GGEM gives investors exposure to 30 of the largest emerging-market companies in the Consumer Goods Sector, all around the world. Top country weights include India, Brazil, and Mexico, while top individual holdings include Companhia de Bebidas das Americas, Astra International, and Fomento Economico Mexicano.

EGShares Consumer Services GEMS ETF (VGEM)

This product gives investors exposure to 30 of the largest companies in the consumer services sector that are based in emerging markets. Top country weights go to Mexico, South Africa, and Chile, while top individual securities include; Wal-Mart de Mexico, Naspers, and Grupo Televisa.

EGShares Health Care GEMS ETF (HGEM)

This  fund gives investors exposure to thirty of the largest firms in the health care segment that are based in developing nations. Indian firms make up nearly 40% of the product and are trailed by South Africa and China to round out the top three. For individual holdings, Dr Reddy’s Labs, Aspen Pharmacare, and Sun Pharma, take the top three spots.

EGShares Industrials GEMS ETF (IGEM)

This ETF gives investors exposure to 30 of the largest firms that are in the industrial sector of the economy and are also based in emerging markets. India and China make up close to two-thirds of the total assets while top individual holdings include Larsen & Toubro, Tata Motors, and Cemex.

EGShares Technology GEMS ETF (QGEM)

This fund offers investors exposure to 30 of the largest emerging market companies that are in the technology sector. Chinese and Indian securities dominate the fund, making up close to 90% of total assets, while top individual holdings include Infosys, Baidu, and Tata Consultancy.

EGShares Telecom GEMS ETF (TGEM)

This ETF offers exposure to 30 of the largest telecommunications companies that are based in emerging markets around the world. In terms of individual countries, China, Mexico, and South Africa take the top three spots, while individual holdings are led by America Movil, China Mobile, and MTN Group.

EGShares Utilities GEMS ETF (UGEM)

This fund gives investors the chance to buy 30 of the largest companies in the utilities sector across a variety of emerging markets around the world. Brazil, India, and Chile, take the top three spots in terms of countries while Cez A.S. Empresa de Energia de Bogota, and Companhia Energetica de Minas Gerais, are the top three individual holdings at the fund’s launch.

Disclosure: Long XIV.