3 Global ETFs Ready to Rally

08/19/2011 12:10 pm EST


Peter Way

Founder and CIO, Peter Way Associates

These are the ETFs where the money is going when it runs scared from diving US equities, says Peter Way of Block Traders’ ETF Monitor.

Fear is a four-letter word. But it’s not called for here; try a “D” word instead, like Disappointment, or Dejection.

Why? Let’s take a look at what the market-making pros’ appraisals of upside price potentials has been for all of some 2,200 stocks, ETFs, indexes, and other equity instruments during the last couple of weeks.

As the market dropped, upside price targets of the big fund managers and their trading facilitators, the block desks and prop traders on the sell side of the street, did not erode by nearly as much. So the upside expectation spreads widened.

Those optimistic constructs reached above where they were in last summer’s market correction, despite the S&P 500 being 125 points (+12%) higher. No fear here.

What about where fear lives for most investors, the downside?

The fourth quarter of 2008 showed what fear really looks like. As market prices dropped then from 1,200 to 900 on the S&P 500, downside anticipations first appeared to contract as prices plummeted faster than the negative concerns, shrinking to an average of only -5%.

Then fear set in as prices dropped further. Their potential lower price bounds outran the market quote carnage. The spreads between prices and possibilities reached -12% and hovered around -11% until transaction strength ultimately carried the market convincingly higher in 2009.

The downside spread between expectations and quotes then narrowed to the more normal -7% area, supporting the market’s recovery into mid-2010. A correction there proved to be insufficiently frightening, and the downsides continued to shrink to -6%, on average.

Several times we commented on the makeup of that average, as it contained an unduly high proportion of stocks with trivial downside forecasts, in comparison with multi-year norms. Denial seemed rampant.

And so now, with the market dropping some 15% or more, where is the fear? We continue to hover above that -7% level.

Probably not because everyone is so thrilled with the performance of the DC minions, or the banks, or the employers, or the consumers. That’s why we think Disappointment or Dejection are better descriptors than Fear.

Discouragement and Despair might precede Fear. Nobody really knows what may happen next. Expectations drive prices, and can be fragile things.

The investment business is an appropriately serious endeavor. But often among all the data, charts, urgent messages, reasoning, and confusing rhetoric, sight is lost of what makes value and supports wealth.

The scorecard is based on prices that are the meeting point of conflicting expectations between buyers and sellers. Each may have convictions driven by widely different means, and may have performance records suggesting greatly differing capabilities at different times. But their ideas and their money make the market—for now.

Inevitably, there is an apparent, yet real, component that is imaginary. Some of that component may disappear when push comes to shove and the asset’s conversion into cash is required. What comes next in the market depends on the next match-up of contestants and their ideas of the future.

So instead of duplicating the historic effluvia so prevalent, we focus on qualified expectations of the future. A future as in the mind’s eye of investment professionals who daily spend what they could put in their pockets, or the pockets of their firm’s, on protection against the risks they must take to earn the astounding and enviable incomes so often publicized.

Here are the international ETFs where their money is going:

iShares MSCI-EAFE Growth Index Fund (EFG)
This ETF tracks the EAFE (European) growth stock index.

Its ample history supports a +6% upside sell target that has seen 11% average gains in about 80% of the 3-months’ days following similar forecasts. The strong experience ranks it better than 94% of all stocks and ETFs on our risk-balanced scale.

Market Vectors Brazil Small-Cap (BRF)
BRF’s rich past experience now offers a +5% upside sell target against +11% accomplishments seen two-thirds of the time. Maybe not a world-beating choice, but it ranks better than 84% of the others in our risk-balanced rankings, and meets our investment hurdle by offering a net annual return rate at about 24%.

Guggenheim BRIC (EEB)
EEB, a emerging markets-oriented ETF, also achieves the hurdle rate, but is far enough up its forecast price range that the upside of only +3% marks it as a momentum play.

In this environment it might be an easy, quick success, but for value investors it looks trivial in comparison with other places to put capital at work.

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