In a recent screen of stock ETF performers since the October 2011 bottom, I came across PowerShares Small Cap Financials Portfolio (PSCF). The fund has catapulted 45% off the 52-week low through 7/16/12 versus 30% for its large-cap brother, SPDR Select Financials (XLF). The PSCF:XLF price ratio demonstrates that the relative outperformance has- for the most part- stayed intact over 18 months.
PSCF tracks a financial sector subset of the S&P Small-Cap Index. Yet PSCF is 40% exposed to REITs, whereas XLF has far greater diversification across banking, insurance, brokerage and real estate trusts (REITs).
It follows that PSCF has essentially been succeeding as a quasi-REIT. Why is this a problem? For one thing, there are a wide variety of REIT ETFs with greater liquidity (trade-ability); PSCF experiences low dollar volume daily, which can lead to wide bid-ask spreads. Secondly, PSCF currently trades at a 1.7% premium to net asset value. Avoid the PSCF.
Shifting gears to the bond world, PIMCO's Australia Bond ETF (AUD) tracks a diversified Australian bond index of investment grade debt instruments issued in the Australian marketplace. It incorporates sovereign AAA-rated country debt, quasi-government bonds, corporates and collateralized securities. What's more, AUD has recently hit a new price peak.
If the global economy were growing handsomely - or heck, even stable - AUD might be a fixed income joy. Unfortunately, this exchange-traded vehicle is based on Aussie dollar-denominated debt and the Australian dollar is one of the most widely traded currencies in the carry trade. Specifically, in risk-on environments, investors sell the U.S. buck and purchase the higher-yielding Aussie buck. In rough times, however, investors sell the higher-yielding Aussie dollar and buy the greenback.
Until there is more clarity on demand in China for commodities, until there is a better sense for European policy, Australia's dollar may be hogtied. And while 3% for AAA-rated Australian bonds are attractive on the surface, the potential for significant currency depreciation in the near-term makes AUD a no-go.
Finally, the exchange-traded agricultural note iPath DJ Grains (JJG) had been in a long-term downtrend. Then, widespread drought and excessive heat decimated crops across America's heartland, sending the price of JJG through the roof of the proverbial silo.
The primary problem with investing in JJG is that it is technically overbought. The easy money has already been made. You have an ETN that is not just 10% above its moving average, nor 20%. JJG is currently 33% above the 200-day trendline. And while it may not revert back to the mean overnight, one would have a higher likelihood of profiting from a ship that hasn't already sailed. Avoid JJG.
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.