Which Sector ETFs Offer Best Near-Term Price Gains?

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Includes: SPY, XLY, XME
by: Peter F. Way, CFA

Summary

PRICE Gains, NOW, not long-term EPS growth. Perhaps double-digit CAGR price rewards, repeatable by other ETFs at subsequent opportune intervals.

Based on FORECASTS of likely coming prices, made by knowledgeable, experienced, motivated professionals whose daily tasks are dominated by such forecasts.

Not based on extensions of past HISTORY trends by folks whose focus is on important, but not sufficient, descriptions of competitive, economic, and accounting minutia.

Choices COMPARED to peer securities as alternative investment candidates, not just as a single “my favorite ETF” of the moment because of some particular current publicity.

Here are such forecasts and their comparisons among appropriate investment competitor-ETFs.

First, look at Risk~Reward trade-offs

What are the Sector ETFs' coming price prospects?

These prospects come from price range forecasts inferred from the self-protective hedging actions of Market-Makers [MMs] as they temporarily must put firm capital at risk in helping big-money fund portfolio managers make volume adjustments in their holdings.

The prospect forecasts are in the form of likely price ranges, usually surrounding the current market quote. From that quote upside and downside potential price changes are suggested. Decades-long daily experiences with such forecasts provide subsequent price experience histories on over 2,500 stocks and ETFs, issue by issue, each across an array of balances between upside-to-downside price change proportions.

Figure 1 maps out the current level of those proportions, in potential percentage price changes, for each of several sector-oriented ETFs.

Figure 1

(used with permission)

Each ETF is positioned in this map by its intersection of upside price change forecast on the green horizontal scale and the price drawdown exposures (on the red vertical scale) typical after prior forecasts like today's. Any issue above the dotted diagonal has more potential risk than return at its present price and outlook. Some of the sector ETFs have more downside price change in prospect here than upside.

The "market" is proxied here by SPDR S&P500 Index ETF (NYSEARCA:SPY) at location [1]. Few sector ETFs have less downside than SPY, and only one has a larger upside forecast, the SPDR S&P Metals and Mining ETF (NYSEARCA:XME) at [12].

Other relevant considerations

While risk and reward are dominant investment determinants, investors also have other concerns affecting their capital commitment preferences. Because we have daily records of how well prior forecasts like today's have worked out, we can provide insights into some of those questions: What has been the ratio of wins to losses? How long has it taken for sell targets to be reached? What worst-case price drawdowns were endured to reach those targets? How credible are current expectations, compared to prior achievements?

Figure 2 compares those and other concerns for each of the two dozen-plus sector ETFs, not only among themselves, but also in contrast to averages for the large population of equity instruments where quality-controlled forecasts are available, but also against the best-ranked issues in that population.

All in terms of the same measurement criteria.

Figure 2

Click to enlarge

source: blockdesk.com

The outside columns, right and left, provide a Rosetta Stone name translation for the symbols in Figure 1.

Columns (5) and (6) are the source for Figure 1 coordinates. The (7) metric tells what % of the (2) to (3) range lies below (4). It discriminates among prior forecasts in (12) to select the similar sample from which columns (8) to (14) data is provided. (13) compares (5)'s promise to (9)'s prior delivery; (14) compares (5) to (6). (15) is a figure of merit combining the several qualitative measures into an odds-weighted, risk-conditioned number.

For this exercise we ranked the generic top investment interests by the (15) figure of merit, with best at top.

In a market of institutional long-term oriented investors looking at stocks with high apparent P/E ratios, and indexes making new highs, it is not surprising to find defensive consumer-oriented ETFs at and near the top of the list. The SPDR Consumer Discretionary Sector ETF (NYSEARCA:XLY) ranks best in the group at today's prices and outlook.

Its Range Index [RI] of 44 means that nearly half of its forecast price range from a low of $79 to a high of $86 lies below (to the downside) the current price of $82.53.

Its rather placid market price behavior during more than a 252-day market year of prior forecasts at this 44 RI level, the worst price drawdowns experienced were only -3.2% . Those drawdowns were recovered from in 5 out of every 6 instances (an 83% recovery rate) on the way to achieving typical price gains of +3.0%.

That may not sound very exciting, until it is noticed those net gains - including losses - were captured in only 38 market days, less than two months. They could be, and should be compounded 6 times in a year, building its rate of return to an annual +21% pace. With a 44 RI frequency of more than one day out of every 5, timing seems to be not much of a challenge. And certainly more reward than a buy&hold of SPY, which YTD in 2016 us up only at a +9% CAGR.

At the other extreme, the most interesting Sector ETF in Figure 1, is the Metals & Mining ETF. With its +16% upside offer, even with worst-case price drawdowns of over -10%, it appeared an intriguing opportunity. But the past experiences, even with a more attractive RI of 34, are that barely half of its over 200 forecast adventures actually overcame those drawdowns, A now offered +16.6% price gain found deliveries of only 1.3% in the past, following prior forecasts like today's.

The blue summary rows at the bottom of Figure 2 offer comparisons with over 2,500 equity investment alternatives other than these 26 Sector ETFs.

Naturally equity investments in a single corporate entity have the potential for larger near-term price fluctuations than funds holding 20-to-50 or more different company stocks. That is what diversification is all about. And the sector ETFs do it fairly well, although, at the moment, not as well as the 500-stock market-index tracking ETF, SPY.

SPY now has a prospective return of +10%, and has delivered over 4%, with recoveries from losses better than 6 out of 8.

Still, where wealth-building is an important objective, active investment within this large forecast population offers dramatic current opportunities, and has delivered numerous double-digit payoffs - in YTD 2016, over 3,650 identifications from daily lists, 20 at a time. This many have reached position closeouts at a net CAGR of over +25%, while SPY in a buy&hold has won only +9%.

Conclusion

We use the best-odds ranking of our forecast population as the most desirable wealth-building investment candidates. To compete with that group, a stock or ETF should have an odds-weighted figure-of-merit ranking at least half of the top 20's score. Today that is half of 27.7 or 13+. Only XLY meets that test and deserves to be considered a competitive buy candidate.

Additional disclosure: Peter Way and generations of the Way Family are long-term providers of perspective information, earlier helping professional investors, and now individual investors discriminate between wealth-building opportunities in individual stocks and ETFs. We do not manage money for others outside of the family but do provide pro bono consulting for a limited number of not-for-profit organizations.

We firmly believe investors need to maintain skin in their game by actively initiating commitment choices of capital and time investments in their personal portfolios. So our information presents for their guidance what the arguably best-informed professional investors, revealed through their own self-protective hedging actions, believe is most likely to happen to the prices of specific issues in coming weeks and months. Evidences of how such prior forecasts have worked out are routinely provided. Our website, blockdesk.com has further information.

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.