Best & Worst ETFs

Best Performing ETFs for Friday December 14, 2007

Energy, specifically clean energy and Commodities (Gold) were the only two sector ETFs I track that were positive on the day.

PBW PwrShr WilderHill Clean Energy 1.55%
GLD StreetTRACKS Gold Trust 0.15%

Worst Performing ETFs for Friday December 14, 2007

It seems the heavy selling was in the Real estate and Banking ETFs.

KBE SPDR Series KBW Bank -4.45%
ICF iShares Cohen & Steers Rlty Ma -3.62%
RWX SPDR DJ Wilshire Intl Real Est -3.43%
RWR SPDR DJ Wilshire REIT -2.93%
VNQ Vanguard REIT ETF -2.89%

Mike Matousek, CMT
Portfolio Manager, ETF Updater
http://etfupdater.com

ETF – Professional Technical Analysis and Money Management Organizations

I believe, to stay on top of their game, money managers must constantly evaluate new market concepts, revisit old trading journals and network with their peers.

To accomplish this task, I belong to a few professional organizations. One of which is the Market Technicians Association (http://mta.org/) and I joined for a few reasons:

1. To learn more about technical analysis to improve my personal trading
2. To meet other professional Market Technicians
3. To help promote the use of Technical Analysis

To Learn more about the MTA click here and to learn more about what a market technician does click here.

Another organization I belong to is the National Association of Active Investment Managers (NAAIM) to visit the organizations website click here.

Each organization has a different focus, but together, they combine the knowledge, insight and camaraderie I feel a money manager needs to succeed.

If you have any questions or would like my opinion about how you can benefit, feel free to contact me. For our contact information click here.

Michael Matousek, CMT
Portfolio Manager, ETF Updater
http://etfupdater.com/

Leveraged ETFs – The Leverage Mix-UP

I’ve come across many market participants believing if they purchase a leveraged ETF and held it for an extended period of time, the ETF’s performance should double the index or sector it’s benchmarked against.

Please understand this is not the case. The majority seek to provide a 200% DAILY return on the underlying index they track.

Notice I typed “DAILY”!

Noted in the ETF providers prospectus, which I’m sure we all read quite diligently. It is stated the leveraged ETF is designed to double the Daily return, not the total return for time periods greater that one day.

I noticed this while I was helping a hedge fund that trades ETFs quite heavily. The were using the leveraged ETFs to hedge the portfolio and noticed the hedge was not delta neutral. The hedge was actually appreciating more than what the underlying portfolio was depreciating.

So, why does this happen? Why doesn’t it track properly if market participants hold positions overnight? Compounding! Just as we all like compound interest you get the same effect here, except since the ETF can depreciate in price it can work adversely too.

Over time the effect of compounding and leverage can have a significant effect on the total return of the ETF.

Here is an example assuming a $10,000 investment.

Day 1:

The underlying index increases 1%
The leveraged ETF increases 2%

The first day = 200% return, just as we thought, and we outpaced the market, great!

Day 2:

The underlying index decreases 1%
The leveraged ETF decreases 2%

Underlying Index Value: $9,999 (An increase of $100 and then a decrease of $101 on day two)

Leveraged ETF Value: $9,996 (an increase of $200 and then a decrease of $204)

As you can see the index decreased in value $1 over two days and the leveraged ETF decreased $4 over the two days (this is four times the cumulative index loss as opposed to two times the loss).

Hopefully, I’ve explained this in detail enough for you to see how over a longer period of time the cumulative percentage change of the leveraged ETF has the ability to vary significantly from the underlying index.

Here are a few popular Leveraged ETFs:

QLD
DDM
SSO
MVV
SAA
UWM

If you would like to learn more about leveraged ETFs visit my home page http://etfupdater.com or http://proshares.com.

Mike Matousek, CMT
Portfolio Manager, ETF Updater
http://etfupdater.com

Financial ETFs – Today’s Hot Sector

The Fed’s “jawboning” seems to have helped the market over the past few days, but only time will tell if it is enough to keep the economy from going into recession.

Today, as of this writing the Dow is up about 380 points or approximately 2.93% and the S&P 500 is up about 2.9%. This is the largest one day percentage gain all year. I don’t believe we are out of the woods quite yet so I wouldn’t load up on speculative sectors or margin just yet.

The financial ETFs (Exchange Traded Funds) XLK, IYG, IAT & IAI are the strongest up 5% plus and today’s price action is indicating one of two outcomes. Either Wall Street thinks the anticipated fed rate cut will be the subprime solution or most investors are having short term memory loss concerning the environment of our financial sector. I’m not sure what they are thinking, but I seriously doubt in two days the financial issues are resolved.

Again, only time will tell.

Our portfolio is only 50% invested on the long side and our model still signals defensive ETFs are the place to be. If you would like to learn more about our defensive stance, an ETF update, our swing trading picks or our model portfolios visit http://etfupdater.com.

Our most recent addition to the portfolio was XLU. This energy ETF provides exposure to companies involved with water and electrical power along with natural gas distribution industries.

Mike Matousek, CMT
Portfolio Manager, ETF Updater

http://etfupdater.com

How ETF Sector Rotation Strategies Can Outperform the Market

It seems with latest buzz about ETFs and the ease of trading individual sectors within an index, sector rotation strategies are becoming increasingly popular. So the question I’m frequently asked is “how can your sector rotation strategy increase the odds of outperforming the market?”

The answer is quite simple. A positive outlook for the economy surely helps the broad market, but many times during the economic cycle some sectors will outperform the market and respond more favorably than others due to various external factors. The intent of a sector rotation strategy is to increase exposure to the sectors anticipated to outperform and reduce exposure to the sectors anticipated to remain flat or under perform. In doing so, the portfolio manager can capitalize on market fluctuations with the opportunity to benefit from sector expansions and sidestep sector declines.

Keep in mind there are many ways to formulate a sector rotation strategy. Here are the most popular:

Technical Analysis, the analysis of price action, trend lines or other quantitative factors enabling technical analysts quantify a trend change

Top-down Analysis, the theory that changes in the economy can signal imminent changes in sector movement

Fundamental Analysis, the approach of evaluating company financials within a specific sector

Therefore, if a portfolio manager monitors the general health of the economy, the various external factors that have the ability to drive a specific sector and has a solid money management strategy they have a good opportunity to outperform the broad market.

To learn more about the sector rotation strategy I employ for my clients or how we swing trade visit my website http://www.etfupdater.com/

Mike Matousek, CMT
Portfolio Manager, ETF Updater
http://www.etfupdater.com/

ETF Swing Trading – Hedging The Portfolio

I’m a trend trader and trend traders tend to weight their portfolios more heavily in the same direction of the trend. Unfortunately, when trading trends, the portfolio tends to give back unrealized profits during counter trend moves, so to mitigate our drawdown I hedge the portfolio.

For example, say there is a firm called Capital ETF Management, it is near the end of the quarter and the ETF Portfolio Manager deems a correction is imminent. He wants to secure some unrealized gains instead of buying ETF options or liquidating positions.

The money manager calls M1 Consulting LLC (that is my consultancy) and they engage us for additional insight as to how they can reduce risk should a correction occur. Capital ETF Management has a portfolio consisting of the following Exchange Traded Funds a Wisconsin ETF, Copper ETF, Alternate Energy ETF, Wilshire 5000 ETF, China ETF, Precious Metal ETF, Brazil ETF and an Emerging Market ETF.

How would I approach the scenario?

First, I need to determine what security has a near perfect correlation to the portfolio (keep in mind this could be a few different securities depending on the portfolios composition).

After further analysis, we realize the Capital ETF Management portfolio has a near perfect correlation with a Profund’s ETF.

Now I can:

Calculate the estimated volatility of the portfolio
Calculate the estimated volatility of the Profund’s ETF being used as a hedge
Determine when the hedge should be put on
Determine when the hedge should be taken

Note: This should all be calculated and determined before the hedge is put on.

Once I calculate the volatility for the portfolio and the ETF being used a hedge I can determine how many shares must be purchased or sold to put the hedge on.

To learn more about hedging or for more swing trading education visit us at http://etfupdater.com/freeinformation

Mike Matousek, CMT
Portfolio Manager for ETF Updater
http://www.etfupdater.com/

Consumer Staples ETF (XLP) – Sector Rotation

There is a saying the smartest minds work on Wall Street. I’m sure many people agree and want to follow the “professional” opinions they read or hear, but with all of the misinformation, opinion changing and ulterior motives I’m been asked, “how do you know what to do”?

The answer is simple. Sure, I read other opinions about the market, but I don’t act on them unless the market’s price action corresponds with idea behind the opinion. For example, many of the “professionals” are talking about a recession or possible depression. One went as far as saying this is the worst since the great depression. Now, I don’t know if he is correct, but I do know this, the Consumer Staples ETF (XLP) is composed of defensive companies. This means, the companies in the index make products people should be buying regardless of the health of the economy.

For example, here are a few companies in the index as of 11/15/07″

Procter & Gamble Co. PG

Altria Group Inc. MO

Wal-Mart Stores Inc. WMT

Coca-Cola Co. KO

CVS Caremark Corp. CVS

PepsiCo Inc. PEP

Kraft Foods Inc. Cl A KFT

Colgate-Palmolive Co. CL

I bet you purchase many of the products produced by these companies or shop with them regularly.

I run a model portfolio at ETF Updater called the “Sector Rotator”. It seeks to outperform the S&P 500 and just before I wrote the post we liquidated the Industrials ETF (XLI) and replaced it with the Consumer Staples ETF (XLP). I’m not pumping the Consumer Staples ETF for investors or Swing Traders, I’m disclosing I do have a position in XLP.

If you would like more ETF Education, Swing Trading Lessons or would like to know when we make changes to our Sector Rotator portfolio visit us at http://www.etfupdater.com/.

Mike Matousek, CMT
Portfolio Manager, ETF Updater
http://www.etfupdater.com/

Complete ETF List – ETF Providers

To learn more about ETFs, how they are constructed, what types are available and which ETF is the best ETF for your investment portfolio you may want to take a look at the following ETF company links.

Here is a current list of ETF Providers:

Barclays iShares
SPDRs
PowerShares
Rydex Funds
State Street Global Advisors
Merrill Lynch HOLDRS
BLDRS
Vanguard ETFs
Fidelity
Deutsche Bank
First Trust Portfolios
WisdomTree
ProShares
HealthShares
Market Vectors
XShares
Arrow Funds
Claymore

If you would like to learn more about how the stock market exchanges work here are the links to a few exchanges:

NASDAQ
NASDAQ Trader
NYSE
AMEX

Happy Trading

Mike Matousek, CMT
Portfolio Manager for ETF Updater
http://www.etfupdater.com

Trend Trading ETFs – What Moving Averages You Should Avoid!

If you trade in the markets I’m sure you have heard the phrase “the trend is your friend”. The phrase makes seems to make sense, IF you truly understand trend trading.

If I had the opportunity, I would change the phrase to “The Trend is Your Friend, IF you know which trend you should be looking at.

Many times I’ve met traders that look at long term trends, but seek a short term trade. Personally, I think this is a rookie mistake since they are only looking at one trend. I can show many instances when traders take losses thinking they are trend trading, which are, but they are selecting the wrong parameters when determining the trend.

For example, one trader I met used the 50 day moving average for swing trading two to three day moves. He has the right idea, sort of, but the price of the ETF could literally fall 10% and the trend would still be intact. Since he was swing trading for such a short time period compared to his trend indicator he couldn’t give his trades enough “wiggle” room to actually work. Therefore, he was constantly getting stopped out for a loss only to see the ETF rally back to a profitable level a few days later.

What’s the moral to this post? Traders need to select a trend that corresponds to their trading time horizon. My trade time horizon is about half of the time it takes to create the end value of the indicator. For example, a 10 day moving average would generally command a four to five day holding period for the ETF in question.

For more swing trading tips or swing trading education visit my website http://www.etfupdater.com/.

Good Luck and Happy Trading

Mike Matousek, CMT
Portfolio Manager, ETF Updater
http://www.etfupdater.com

Commodity ETF Assets Growing

Commodity ETF Assets Growing Exponentially

Assets invested in natural resource ETFs continue to grow at an astounding pace. For example, assets in natural resources grew more to more that $2 billion from about $250 million at the end of 2006.

I generally follow the following commodity ETFs:

DBC, DB Commodity Index
GDX, Market Vectors Gold Miners
GLD, Street Tracks Gold Trust
IGE, iShares Goldman Sachs Natural Resources
DBA, PowerShares DB Agriculture
SLV, iShares Silver Trust
UNG, United States Natural Gas Fund

On another note, JC Penny will be in play today so we will be focusing on the RTH (retail HOLDRS) ETF and the XRT SPDR S&P retail ETF.

Happy Trading

Mike Matousek, CMT
Portfolio Manager, ETF Updater
http://www.etfupdater.com