Concept ETFs Provide Portfolio Stability

Most sectors of the economy and most broad-based measures of the U.S. stock market still remain below their 200-day trendlines. (Energy and Materials are the exceptions to the rule.) Yet several strategic alternatives, or "Concept ETFs," have recently moved into a favorable technical light.

Consider the PowerShares Value Line Industry Rotation Fund (PYH). It was impressive enough to garner 14% in 2007. In 2008 (through 4/18), its -4.4% remains relatively manageable. Better yet, its price recently climbed above its long-term trend. (That's something the S&P 500 SPDR Trust (SPY) is still 4%-5% away from reaching.)

Of course, PYH is not the first fund to put forward an ETF that specializes in moving into and out of the "hot" sectors. The Claymore/Zachs Sector Rotation Fund (XRO) has traveled this path as well, with extremely similar results. Yet the important item to note is the relative success of "Concept ETFs" when compared with the overall market.

In a post last November, I noted that many strategic/conceptual ETFs were outperforming the broader markets. Granted, asset class ETFs (currency, commodity, bond, stock) must remain core holdings for a diversified portfolio. Nevertheless, there's ample reason to consider: (a) sector rotation, (b) covered calls, (c) "currency harvesting" and even (d) "technical leadership."

The latter concept has its own exchange-traded vehicle, the PowerShares DWA Technical Leaders Fund (PDP). Through 4/18/2008, it was down a mere 3%. Better yet, PDP is also in a "technical uptrend."

The PowerShares DWA Technical Leaders Fund tracks an index that pulls 100 U.S.-listed companies from a pool of 3000. The 100 pulled are purported to have powerful relative strength in a particular sector or sub-sector. The index is reconstructed quarterly.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

Comments

[jayapal:]

i think it is counterproductive to recommend etf's with daily volume of 10k and 30k respectively.

2008 Apr 23 12:24 PM

[Geoffrey Lordi:]

Jayapal,

I used to think that, too, but it's not really a problem with limit orders...I've been buying PCY for many months and that ETF's average volume is only about 21K shares. Most of the time my orders fill below my entry price (Merrill Unlimited Advantage trading)...

If you're trading, 10k-30k shares mightn't be enough. But, in your own words, trading ETFs like these, that involve sector-based, temporal, rotation would be counterproductive.

2008 Apr 23 03:32 PM

[Mike Moody,...:]

ETF volume should not be a major concern for investors. ETFs, like open-ended mutual funds, create shares ("creation units" in the case of an ETF) as they are needed. If an ETF trades only 1000 shares per day, but you have a $10 million order, they simply create the shares they need to fill the order. Since the ETF can be arbitraged against the underlying shares, the prices generally don't get too far out of line.

2008 Apr 23 03:51 PM