Profit From ETFs In The Q2 2013 With These Trading Strategies

Includes: BSV, CSJ, EXT, UUP
by: Sandeep Godiyal

The first quarter of 2013 proved to be a high water mark for the major U.S. equity indices. This is because all three benchmarks reached multi-year highs. The S&P 500 finished the quarter with a record close of 1569.19, a gain of six points. Meanwhile, the Dow Jones Industrial Average recorded the best first quarter figures it has experienced since 1998.

The markets were the beneficiaries of a wave of buying from investors, who now see the stock market as a better place to invest in. These investors deemed it wiser to park their money in ETFs than in bonds. However, going into the second quarter, investors may have cause for concern. Historically, markets lose steam during this time of the year following a strong first three months.

This year may buck this trend as U.S. economic fundamentals are leaning toward the positive. However, vital indicators like unemployment, retail sales and housing, as well as corporate earnings, still need to demonstrate long-term improvement. When this happens, it would be safe to assume that the equities market can continue growing in the second quarter.

Investors interested in ETFs can try out these trading strategies that have a high chance of success in the following quarter.

  1. Focus on earning ETFs. Corporate earnings are recognized as the biggest factor affecting stock prices. It can be remembered that the fourth quarter of 2012 saw low expectations on earnings. This is one of the major causes of the increase in equities. This year, however, the market is expected to move differently especially since the economy is showing signs of recovery. This has raised expectations for the coming second quarter earnings season. Investors can play the earnings momentum as part of their investment strategy. ETFs minimize volatility by focusing on stocks issued by companies that have strong bottom lines. It is important to note, though, that there is a bit of a risk in these funds due to the concentration on a small handful of companies. The recommended fund for investors wishing to pursue this strategy is the WisdomTree Total Earnings ETF (NYSEARCA: EXT). For those who are looking for earnings in the small, mid and large cap segments, the EES, EZM and EPS respectively are great options for their money. However, investors who choose to buy into these ETFs should use them as part of a long-term investment strategy.

  1. Pursue a conservative strategy by buying into short-term bond ETFs. Despite the growth of the stock market, short-term bond ETFs continued to be popular with investors in the first quarter. These ETFs drew huge inflows in the first quarter against the background of uncertainty surrounding other safe haven instruments. ETFs tracking long-term treasury bonds have been slumping due to their sensitivity to high interest rates. The stable dollar and stronger equities, on the other hand, have caused large players to place selling pressure on gold. Hence, short-term bonds have emerged as the new safe haven investments. This trend could continue into the second quarter of 2013. Investors who want to add these ETFs to their portfolio as part of a conservative investment strategy can look into funds with good liquidity and a big asset base. Some examples of these are: the Vanguard Short-Term Bond ETF (NYSEARCA: BSV) which has an expense ratio of 11 basis points and a yield of some 1.5 percent; and the iShares Barclays 1-3 Year Credit Bond ETF (NYSEARCA: CSJ).

  1. Consider dollar-indexed ETFs. The U.S. dollar has recently strengthened due to the continuing eurozone crisis and the devaluation of the Japanese yen. Another contributory factor is the deprecation of the UK pound on the back of its credit ratings downgrade by Moody's and a weak economic growth outlook. This trend seems like it is set to continue in the mid-term due to the expectation that other global currencies will continue to weaken. There seems to be an absence of any major catalyst that could cause them to strengthen going forward. One exception would be the British pound which may see some strengthening in the short-term as it is seriously oversold. To take advantage of the stronger greenback, investors can look into the PowerShares DB US Dollar Index Bullish ETF (NYSEARCA: UUP).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.