Five Ways ETF Investors Are 'Buying' the Global Recovery

by: Gary Gordon

Financial papers mention items on the “here’s-what-could-go-wrong” list. They’ll cite the uncertainties surrounding U.S. home price depreciation, state insolvency, European nation credit flare-ups and emerging country inflation.

Nevertheless, the commonplace assumption is that the healing will continue. And the investment community is eating it up. On the first day of 2011 trading on the U.S. exchanges, the appetite for risk came in a variety of forms:

1. The smaller the better? Smaller-cap stocks often outperform large-caps in the early stages of recovery. Even though the global industrial cycle kicked back into gear roughly 2 years ago, the 2010 summertime slumber may have provided small companies with a new pair of bull market sneakers for the New Year. Get a gander at the way micro-cap ETFs have out-hustled small company ETFs… and how small fries have outshined the big dogs.

1/3/2011 Approx %
First Trust Microcap (NYSEARCA:FDM) 2.48%
iShares Russell 2000 (NYSEARCA:IWM) 1.88%
SPDR S&P 500 Trust (NYSEARCA:SPY) 1.05%

2. From Laggards to “Most Coveted?” Lenders, bankers, brokerages, home construction financing. In the first 10-11 months of 2010, these were disastrous ETF holdings for any portfolio. And while they seemed to have caught fire in December, the trend towards acquiring formerly unloved shares of credit-intensive industries has spilled over into January. Whether it’s the increase in M&A or a jump in venture capital, investors seems to believe that the lifeblood of business (credit) will flow with greater ease.

1/3/2011 Approx %
SPDR Select Financials (NYSEARCA:XLF) 2.07%
iShares DJ Financial Services (NYSEARCA:IYG) 1.92%
SPDR KBW Capital Markets (NYSEARCA:KCE) 1.30%

3. Who, Us? Worry About Chinese Inflation? Although inflation remains China’s number one policy concern, investors have become increasingly comfortable with the “soft economic landing” scenario. Manufacturers in the world’s second largest economy expanded at a slower pace in December, leading many to surmise that the country’s central bank will have less need to tighten monetary policy. On 1/3/2011, investors snapped up shares of neighboring Asian countries/localities more than any other region.

1/3/2011 Approx %
iShares MSCI Hong Kong (NYSEARCA:EWH) 2.33%
iShares MSCI Thailand (NYSEARCA:THD) 1.30%
iShares MSCI Malaysia (NYSEARCA:EWM) 1.20%

4. Living In A Materials World? In 2010, “stuff” rose more in value than the shares of explorers/miners/transporters themselves. It’s difficult to say whether or not commodity price inflation will kick into overdrive here in ‘11. By the same token, even at current commodity price levels, the profitability of the companies providing materials and resources could be record-breaking. And investors seem to think that… for one reason or another… global demand will strain global supply.

1/3/2011 Approx %
Global X Lithium ETF (NYSEARCA:LIT) 3.83%
iShares S&P Global Timber (NASDAQ:WOOD) 2.31%
Market Vectors Coal (NYSEARCA:KOL) 2.25%

5. Capital Shunning Bond Funds? Nobody has a good word to say about them these days. And while a contrarian investor may wish to pick through the recent wreckage, a trend-follower shouldn’t hitch a ride on ETFs that are under duress.

1/3/2011 Approx %
Vanguard Extended Duration Treasury (NYSEARCA:EDV) -1.32%
PIMCO 25+ Zero Coupon Treasury (NYSEARCA:ZROZ) -0.91%
iShares 20+ Year Treasury (NYSEARCA:TLT) -0.68%

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.