Best ETF Market-Maker Price Gain Forecasts: QE Taper Impact?

Includes: IYH, SPY, XBI, XES, XLV, XRT
by: Peter F. Way, CFA

The Fed's tiny taper tangent may have stirred some market interests, but the impact overall is hard to find when we compare market-maker [MM] ETF forecasts before and after their recent announcement.

Our regular daily update of over 200 actively-traded ETFs gets pared back a bit by quality controls, but still offers a wide disparity between the dozen or so most promising and the larger liquid ETF population. Here's what the MMs' current expectation look like now.

These are screened out of over 200 actively-traded ETFs that have at least 3-year to 5-year histories, ones that have 25 or more prior days in that time where they previously traded at upside-to-downside price-change forecasts like those seen now. Moreover, they typically reached upside forecast sell targets in at least 7 out of every 8 cases, and none had worse price drawdowns below cost after the fact than the upsides then being forecast beforehand. For more insight into where this information comes from read this.

Just for comparison with their averages, we include what is being expected for the SPDR S&P 500 (NYSEARCA:SPY) as a sort-of-passive market alternative.

Now for a comparison with what the MMs thought about these issues less than two weeks ago, in the same format:

In terms of overall market impact, as measured by the 188-ETF population, there is little change from before the Fed's announcement to after it. The population's average price range forecast of from upside of +9.5% to downside of -8.7% showed little change to +10% and -8.2%. A bit more uncertainty is presented by expanding in both directions, but no complementary shift of both limits in the same direction, suggesting an increase in bullishness or bearishness.

The value of careful selection within this active population is evident. When we look at the prior price change experiences of the "best" ETFs following earlier Range Indexes at their today levels, average gains of +5-6% compare with population averages of only 1% or fractionally better. That, combined with being achieved in a month-and-a-half (30+ market days) instead of over two months (40+ days) puts their wealth-building rates up in the 40+% range instead of the single-digit efforts of the overall group.

Many of the same "best" ETF names appear on both lists, retaining their competitive appeal as buy investments. For example, note the S&P Retailing SPDR (NYSEARCA:XRT), the S&P Healthcare SPDR (NYSEARCA:XLV), the S&P Oil & Gas Equipment SPDR (NYSEARCA:XES), the S&P Biotech SPDR (NYSEARCA:XBI), and the iShares US Healthcare ETF (NYSEARCA:IYH).

We encourage you to do your own due diligence on the ETFs that may be appealing in terms of their trade-offs between expected price gains and past worst-drawdown experiences. You won't get ahead of the market-makers, but you may well be able to benefit from what they are thinking. Many have.

Disclosure: I 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.