Long-term investors sometimes have short-term needs
When they do, current price prospects take on an importance usually submerged by dominant portfolio strategies of patience, fortitude, and diversification. For the moment there is value in being astute in making intelligent choices on the basis of near-term potential price changes among present portfolio holdings.
Where that is the case, and the need is for skills not regularly sharpened, some outside consulting help can often be productive. It can be found in an usually overlooked, unbiased source constantly present in the way that equity markets regularly function.
All stocks fluctuate in price over the course of a year, some more than others, and not all in the same direction at the same time. What causes the differences in price change is not broad economic expectations, but the submerged prospects specific to each security's situation.
Prospects revealed early by the perspective developed over years of diligent ongoing research by trained and experienced analysts, more likely in the employ not of brokers, but by managers of funds handling the capital of institutions and individuals. Prospects continually being evaluated by portfolio managers, who like all of us, want to see the assets in their charge prosper.
They manage the assets actively; that is their job, continually evaluating where the best opportunities for price growth lie, and where potential exposures for price drawdowns exist. Their decisions are translated into holdings-change decisions, usually of sufficient size to make meaningful differences for the whole portfolio. How and why these translations take place is more fully explained in our earlier study here.
Their trade orders are translated by experienced professionals of the market-making [MM] community into likely ranges of price change over coming weeks and months. Records of prior forecasts and the subsequent actual price changes provide historical odds for and scale of the directions of prospects now seen.
We looked at over 400 ETFs where such forecast information is available, and selected the 20 that are most widely monitored by Seeking Alpha readers and contributors. Some basic marketability circumstances of those 20 ETFs are described in Figure 1.
Formal ETF names for the symbols at the left of Figure 1 are found at the right side of the table, along with an indication of the number of SA readers regularly desiring information about them.
By and large these are ETFs with well-established, active markets. Half of them have trading values of a $ billion a day. The diversity of interests present here is impressive.
The largest, most frequently SA-reader requested issue is the SPDR S&P 500 Trust ETF (NYSEARCA:SPY), often taken as a proxy for the U.S. stock market at large. It has a public capital commitment presently of $170 billion, and is followed in investment size by the PowerShares QQQ ETF (NASDAQ:QQQ), a tracker of the Nasdaq 100 market index. The SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA) is midway down in the most-favored rankings as another broad-market average tracking security.
But second in reader interest is the SPDR Gold Trust ETF (NYSEARCA:GLD) which attempts to track the price of gold bullion (in U.S. dollars) by holding gold as a commodity. The concern over U.S. dollar monetary value is also reflected in the sixth-ranked ETF (in reader interest), the iShares Silver Trust (NYSEARCA:SLV), which like GLD holds precious metal. Further down another ETF, the Market Vectors Gold Miners ETF (NYSEARCA:GDX) adds to this preoccupation by holding shares in miners of precious metals.
Another focus of SA readers and investors appears in the dividend income from stocks. The iShares Select Dividend ETF (NYSEARCA:DVY) and the iShares International Select Dividend ETF (NYSEARCA:IDV) team up with the iShares U.S. Preferred Stock ETF (NYSEARCA:PFF) to provide emphasis on this payoff dimension. Further interest in income (and hopefully principal) reliability come from bondholding ETFs of the iShares Core U.S. Aggregate Bond ETF (NYSEARCA:AGG) and the iShares 20+ Year Treasury Bond ETF (NYSEARCA:TLT). How satisfying those interests turn out to be may be caught up in the world investment public's reactions to U.S. Federal Reserve's decisions to encourage higher interest rates in coming years.
The dominant conservative nature of many of the ranked ETFs minimizes the more constructive orientation of ETFs focused on energy, healthcare, emerging markets, and the growing role of China in the world's economy.
If choices need to be made, where might they be best?
For that we turn to what market-professionals see in the trade-order choices made by their big-$ fund clientele as they constantly adjust their portfolios. These clients have the money muscle to move market prices, but don't want to do it in ways that preclude their sharing in the advantage of future changes. Their current actions usually have implications for coming prices, of which the market pros are constantly re-evaluating.
Figure 2 shows what these 20 ETFs suggest may be ahead in their prices of the next weeks to months. Along with those forecasts are the histories of how well prior forecasts with upside-to-downside imbalances like the present have previously proven out.
This flood of information is best assimilated in increments. The current MM forecasts, based on their hedging activities to protect firm capital required to be put at risk in getting client orders filled, is in columns (2) and (3), with current prices at (4). (5) is the difference between (2) and (4). The complement to (5) is shown in (7), not as the difference between (3) and (4), but as its proportion of the whole range from (2) to (3).
This Range Index [RI] lets us compare on common terms securities that may have different ranges of uncertainty. We use today's RI downside proportion as the standard of comparison in each ETF to compare against in evaluating how likely today's forecasts may come to pass, based on prior experiences. The number of RIs like today's is counted in (12) out of the forecasts available out of the market days of the last 5 years'.
A good place to start in comparing the current-day attractiveness (on coming price change basis) is usually in the reward~risk proposition for each security. The reward prospect is offered in (5).
The choice of a risk measure stems from the use of behavioral analysis to infer what prices may be coming, and a definition of risk as loss of capital, not just a sense of discomfort due to uncertainty (which also includes favorable surprises).
Our experience has shown that the likely worst-case price drawdowns will be greater than what MM forecasts indicate. It is at this point of high emotional stress where the investor is most likely to give up and seek to avoid losing any more capital by selling, thus locking in a loss. So we regard this as a better measure of risk than any other.
The comparison of rewards and risks is made visual in Figure 3, where data in Figure 2's columns (5) and (6) form the co-ordinates to Figure 3's plot points.
(used with permission)
The upside prospects of (5) relate to the horizontal green scale, while the drawdown exposure experiences of (6) are pitted against the vertical red scale. The points of equality between them are the dotted diagonal.
The most promising and least threatening investment candidates, on this trade-off, are down and to the right, and the least appealing subjects for additions are up and to the left. While none of these pictured appear as major threats, in the opposite, attractive direction, the ProShares Short S&P 500 ETF (NYSEARCA:SH) at  appears to be most positive. Choosing GLD entertains no more drawdown exposure than SH, but gives up the prospect of greater reward.
Still, a further examination of the data in Figure 2 may make a buy-decision choice here difficult.
A look at how credible and how reliable similar forecasts have been in the past is essential. A check of the forecast's quality is needed, in addition to its quantity, or scale of what is being offered.
The forecast reward (5) - in comparison with what was actually produced by like prior forecasts (9) - provides a measure of credibility. That is calculated and presented in (13), where anything close to or above 1.0 is encouraging.
The (9) results are net of encountered losses among the (12) sample. The loss frequency is revealed by the Win Odds of (8), its complement, which shows how often prices were able to recover from the drawdowns of (6) and actually reach the targets offered in (5) or at least be above the costs of (4) by the end of a 3-month holding period.
For SH those proportions are not encouraging. Profitability from like prior forecasts, 145 of them, has occurred only about 1/4 th of the time, resulting in a net average loss of -2%. The resulting credibility ratio turns negative, not a good sign.
Along with this, perhaps partly in explanation, please recognize that SH is a short, or inverse-structured ETF. Its price goes up when the underlying holdings (here the S&P500 Index) goes down. Securities of this type have to fight a disadvantage built into the nature of their being. It is required to rebalance daily the holdings that produce the "short" effect. All things being equal, an opposite ETF, being "long" the same underlier, gets a daily benefit roughly equivalent, particularly when operating leverages are involved.
As a general rule inverse ETFs are an unwise holding. Exceptions may occur if one is prompted by a specific anticipated event, expected in a very short (days to weeks) definable period. Those circumstances do not fit the conditions considered in this report where we compare ETFs that are popular to monitor, so we would avoid committing new capital to this security.
In addition, any security with demonstrated win odds as poor as only 2 out of 3 (67%) is likely to be contested by many alternative investment candidates with win odds above 8 out of 10, having payoff credibility ratios of 1.0 or better. SH's win odds are horrible, and invite losses.
Usually a reward~risk tradeoff map like Figure 3 is a good first-step appraisal tool in comparing alternatives. In this specific case a deeper evaluation is needed.
The securities in Figure 2's table are ranked, top to bottom, by a figure of merit [FOM] in (15) which applies the win odds percentage to the offered upside of (5), and the complement of the win odds to the drawdown exposure indicated in (6), makes adjustment for the credibility ratio of (13) and the frequency of opportunities of the sample size in (12). Experience has shown this FOM to be helpful as a profit discriminator. Helpful, not perfect.
If the task at hand is to find a good investment buy-candidate from among the SA-popular ETFs at hand Figure 2's rankings may offer a better place to start. The PowerShares QQQ ETF tracks the NDX-100 stock index, heavily influenced by technology-oriented issues, including Apple (AAPL), its largest component. QQQ's high rank is partly due to its win odds of 81 based on a frequent (281 appearances out of 1261) presence of prior forecasts with upside-to-downside balances like the present.
Next-higher ranked ETFs may carry investor biases about their coming price prospects, both near-term and longer-term. The iShares U.S. Real Estate ETF (NYSEARCA:IYR) for some investors carries certain recent-years historical baggage. The iShares S&P Small-Cap 600 Value ETF (NYSEARCA:IJS) have both distinctions of market-capital commitments and of arbitrary "style" classifications in its orientation towards holdings accounting characteristics favoring more static evaluations rather than holdings favoring growth of worth. Other investors may see appeal or concern in either or both of these dimensions.
Neither IYR nor IJS have the appealing reward-credibility credentials held by the iShares Select Dividend ETF, but both IYR and IJS have higher rewards potentials than DVY's minimal +1.7% coming price change forecast prospects. Which of these the investor might prefer is likely to depend on personal experiences.
No one said that making such choices was going to be simple and easy. Nor may it be any less so where the task is to find a source of capital from present holdings - holdings here defined as among the ETFs of most interest to SA participants.
Going back to Figure 3, there are few much above the dotted diagonal of equivalent gain and pain. So decisions may come back to things influencing the buy task, but for reasons of opposite objectives.
The ETF that may be the best source of capital to meet unplanned-for needs may be the one that offers the most upside potential, but does so at highest cost, the iPath S&P500 VIX Short-term Futures ETN (NYSEARCA:VXX) at  in Figure 3's upper right corner. Its ownership has about a 1-in-3 chance of producing a profit during the next 3 months, and if the other two chances occur during that period the net loss (historically) has been -4.8%, a CAGR of -21%.
VXX is not very great insurance against a market decline, especially when SPY has forecasts for +7% price increase possibilities during the period. True, SPY is seen by the same appraisers of having -4.3% worst-case price drawdowns, but has had ~3 out of 4 recoveries from them without any outside insurance and maintained a nearly +2% gain (+10% CAGR) in the process.
The second-best choice for a source of capital from an already-held ETF is a "beauty-contest" between the possibility for near-term price recovery in Crude Oil to boost the market quotes for the United States Oil ETF (NYSEARCA:USO) at  in figure 3, and a guess about how well the Chinese have learned (or are learning) to play the capitalist economy game, as evidenced by MM appraisals for the iShares China Large-cap Stocks ETF (NYSEARCA:FXI) at .
This is something of an out-the-back-door "horse-race" decision-under-uncertainty, where both USO and FXI have 5-year histories of hundreds of prior like-RI forecasts with less-than coin-flip win odds, and net negative payoffs resulting. It's hard to claim any expertise in this choice. Ask Hobson?
The more pleasing job to have at hand
The happier task of putting unplanned-for capital availability to work illustrates the major differences, both justifiable, and therefore each "correct," between wealth-preservers and wealth-builders. As Niccolo Machiavelli put it centuries ago: "Everyone has his reasons."
The over-riding impression given by the nature of ETFs most-followed by Seeking Alpha readers and contributors is dominance by the wealth-preserver community. They want to know where the equity and other asset-class markets are, and what is generally expected of their prices, in the persona of SPY, QQQ, DIA, AGG, TLT, and PFF. They are alert to threats as may be seen by SH and VXX. They are alert to shifts in the yardstick of measurement, the USD, by watching precious metals GLD, SLV, and GDX. Their attention to income opportunity and norms is apparent in DVY, IDV, IYR and PFF.
The presence of IVE and IJS value-styled subsets of the S&P500 keeps clear the emphasis on wealth-preservation over wealth-building. The iShares U.S. Healthcare ETF (NYSEARCA:IYH) and greater intensity of interest in technology-heavy QQQ than in the established big-cap global nature of DIA holdings helps to reassure that there is an interest in capital growth, even if not a priority.
The way the table in Figure 2 is assembled, the emphasis is oriented to help wealth-builders, rather than wealth preservers. Its information should not undermine the preservers, but may be more useful to the builders. QQQ, IYR and IYS are the better odds-on choices in the strategy of "the best defense is a good offense."
The blue-row summaries of Figure 2 provide a comparison of these ETFs with the present opportunities for wealth-building among our ~2500 stock and ETF population for which we have issue-by-issue near-term MM forecasts of likely coming price ranges. There are clearly major advantages among the best-ranked 20 of those stocks in comparison to these ETFs.
At the same time, the MM forecast population at large can be a far worse place to be than some of the better 20 in the ETFs of SA reader high interests.
The emphasis established by this interest-ranking of ETFs is simply a heads-up for those in the SA community who may have different investing needs and interests. Those who are under the time pressure of present or impending financial needs or objectives may get misled by the apparent emphasis often present on dividend or coupon yields when present-day fixed interest-rate structures are totally inadequate to their pressing needs.
For them the message is that intelligent and disciplined reward-to-risk tradeoffs can provide meaningful relief from uncomfortable circumstances. Where we can be of help, it is our mission to do so.
The same misdirection about dividends may occur when younger investors see what may appear as bountiful time availability. For them it may seem adequate to build wealth more slowly by apparently assured increments. And for some that may work. But for many the unexpected intrusions of real life and the pernicious behavior of some societal competitors tends to produce regrets that, once gone, the consumed time was not better used.
In the investing arena the development by investors of skills in balancing the trade-offs of risk and reward can often lead to reaching that point in life where preferences can comfortably shift to wealth preservation from wealth-building. It is a far better outcome than leaving the results to chance.
Disclosure: I/we 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.