Bottom Fishers Look to Profit From the Weakest ETFs

by: Gary Gordon

Some ETFs have been doing terribly for a long time. More specifically, they’ve carried extremely high levels of standardized risk, wallowed in the bottom quartile of relative strength rankings and offered negligible or negative 1-year returns.

On October 5, however, better-than-expected service sector expansion supposedly helped many of the weakest stock ETFs outpace the broader market. One might more clearly explain the single-day activity as a function of a bottom fishing expedition.

Here’s a quick gander:

Worst ETFs Get A Gigantic One-Day Vote Of Confidence
10/5 Approx % Approx 1-Yr
iShares MSCI Spain (NYSEARCA:EWP) 5.1% -12.1%
iShares MSCI Italy (NYSEARCA:EWI) 4.3% -12.9%
iShares MSCI Japan (NYSEARCA:EWJ) 3.3% 5.0%
SPDR KBW Bank (NYSEARCA:KBE) 3.3% 4.6%
Oil Services HOLDRs (NYSEARCA:OIH) 3.2% 3.1%
PowerShares Water Resources (NYSEARCA:PHO) 3.1% 4.6%
PowerShares Lux Nanotech (NYSEARCA:PXN) 3.1% -10.4%
SPDR S&P 500 Trust (NYSEARCA:SPY) 2.1% 13.5%
Click to enlarge

How might we tell that some of the riskiest, least coveted ETFs caught a one-day reprieve? You simply need to flip the switch in reverse. Specifically, many stock ETFs with lower standardized risk scores, extraordinary year-over-year gains and relative strength percentile rankings near the top of the leader-board underperformed the S&P 500 SPDR Trust (SPY).

Best ETFs Get A “Relative Breather”
10/5 Approx % Approx 1-Yr
iShares MSCI Thailand (NYSEARCA:THD) 1.6% 49.9%
Vanguard Telecom (NYSEARCA:VOX) 1.6% 22.4%
SPDR Retail (NYSEARCA:XRT) 1.5% 26.7%
iShares DJ Real Estate (NYSEARCA:IYR) 1.3% 35.7%
WisdomTree India Earnings (NYSEARCA:EPI) 0.9% 31.6%
iShares MSCI Chile (NYSEARCA:ECH) 0.2% 57.5%
JP Morgan Alerian MLP (NYSEARCA:AMJ) 0.2% 45.5%
SPDR S&P 500 Trust (SPY) 2.1% 13.5%
Click to enlarge

You’re not going to want to be fooled here. The greatest areas of stock market risk in the “near-term” remain with: (1) Japan… due to the profit margin challenges for its exporters, (2) European PIIGS… due to ongoing austerity/government debt uncertainty and (3) Banks… due to the ever-changing nature of their assets as well as earnings weakness.

In contrast, telecom remains recession-resistant, while pipeline MLPs will benefit from crude oil trading above $80 per barrel. Moreover, emergers like Chile (ECH) and Thailand (THD) are less volatile investments in solid companies of vibrant economies.

Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.