Long-Term Thematic ETFs or Near-Term Momentum?

by: Gary Gordon

Scores of investment gurus live on momentum and relative strength. They may advocate investing solely in those assets that have put together streaks over 4, 8 and 12 weeks (3 months).

Other media darlings don’t care what happens in a shorter period. They may run with a particular theme for decades. For instance, Jim Rogers likes commodities and the China growth story, irregardless of the bumps that may occur along the path.

Sometimes, the hottest three-month winners are the same investments that fit a longer-term premise. For example, in 2009 as well as in parts of 2010, commodities and commodity-rich nations benefited from U.S. government decisions that weakened the U.S. dollar. Those that believe in the dollar’s demise over the long-term profited in shorter-term periods as well as year-over-year periods.

Some longer-term themes fall on deaf ears. The notion of cheap P/Es and an aging baby boomer demographic didn’t help healthcare-related stocks in 2009 or 2010. Healthcare-related stocks severely underperformed in year-over-year periods as well as longer-term time frames.

Interestingly enough, healthcare has rocketed year-to-date. Pharma ETFs and biotech ETFs even look pretty sharp over the last 12 weeks, showing tremendous relative strength.

Approx 3 Mo % Approx 1 Year
Momentum Standouts
WisdomTree Small Cap Japan (NYSEARCA:DFJ) 10.7% 16.9%
iShares MSCI Japan (NYSEARCA:EWJ) 7.3% 15.2%
SPDR Select Sector Utilities (NYSEARCA:XLU) 6.0% 15.8%
Vanguard Consumer Staples (NYSEARCA:VDC) 4.2% 21.9%
iShares DJ Aerospace (BATS:ITA) 3.0% 23.2%
SPDR S&P 500 Trust (NYSEARCA:SPY) 1.1% 24.3%
Thematic Standouts
Powershares Dynamic Oil Services (NYSEARCA:PXJ) 0.3% 61.2%
Global X Copper Miners (NYSEARCA:COPX) -0.6% 58.7%
PowerShares NASDQ Internet (NASDAQ:PNQI) -0.8% 48.3%
iShares MSCI Thailand (NYSEARCA:THD) -0.2% 46.8%
PowerShares Fund Small Growth (NYSEARCA:PXSG) -0.5% 40.2%

Some of the more popular themes with corresponding ETFs have struggled in the recent three months. For instance, small-cap growth assets experienced a remarkable 12-month ride on the idea that the U.S. economy is recovering and can continue to grow on its own. With U.S. economic indicators from housing to unemployment to consumer sentiment worsening, however, small-cap growth has had its difficulties over a three-month time period.

Similarly, energy and materials stocks dominated the one-year timeline on the theme of increasing demand in the developing world. Yet they’ve had difficulty building momentum in the near-term due to emerging market credit tightening and questions about demand out of austerity-struck Europe.

In contrast, the most recent victors have been the non-cyclical ETFs (e.g., staples, utilities, etc.) as well as Japan ETFs on a “bounce-back” from an earthquake-induced economic contraction. Moreover, if three-month momentum is to be recognized as an indication of what is likely to outperform in the near-term, one might stubbornly conclude that we are in the latter stages of the current bull market.

Of course, there’s no reason to adhere to momentum or to long-term themes alone, as some of your best laid plans will be decimated. Manias from dot-com to alt energy to nanotech have been losing propositions.

Indeed, one may lay the foundation for his/her portfolio on themes that resonate. For example, I have been emphasizing the key roles that Asian neighbors play in China’s growth for years, advocating ETFs like iShares MSCI Malaysia (NYSEARCA:EWM), iShares MSCI Singapore (NYSEARCA:EWS) or iShares MSCI Thailand (THD). Yet I’m equally cognizant of shifts in momentum. For that reason, I will incorporate investments with momentum, particularly those producing income like SPDR Select Utilities (XLU).

In other words, your portfolio is not meant to be an all-or-nothing proposition. Just as you might check your portfolio for diversification across assets and diversification across certain economic sectors, you may choose to diversify between long-term themes and near-term performers.

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.