The ABCs of ETFs

08/05/2005 12:00 am EST

Focus:

Richard Lehmann

Publisher, Forbes/Lehmann Income Securities Investor

Given the high respect I have for Richard Lehmann and his long standing expertise in income investing, I am confident that he will be an equally successful guide to the world of exchange traded funds. Here's a look at his newly launched service, The ETF Investor.

"The stock market is beginning to show some life and a full fledged rally may yet emerge. Those with faith need to consider which sector of the market will lead the way. Will it be high tech, the blue chips, the S&P 500, growth stocks, value stocks, or the small-cap companies. We believe that high tech and growth stocks will be among the leaders. High tech because it is one of the most beaten down sectors and because sales and earnings are showing substantial growth.

"While some may choose to make a sector play in high tech, for the less adventurous, the  NASDAQ-100 Index  (QQQQ NASDAQ), which represents the 100 largest cap companies on the NASDAQ, may be a safer bet. It is a cap value weighted index and therefore, the top ten holdings represent 40% of the entire portfolio. This is one of the oldest and largest ETFs because its size and diversity makes it a popular vehicle for large funds to hedge their portfolios. Because of this, it should be considered more as a momentum stock for short-term investment rather than a long-term core holding.

"Not unexpectedly, energy related ETFs remains among the best performers and we think the oil sector is the place to be . Sustained high oil prices will eventually lead to formerly unproductive sources to come on-line and will be an incentive for new drilling and production.  Large multi-national oil companies are running down their reserves and will need to replenish them. With oil prices staying so high for so long we think they will use some of their huge profits for additional exploration and drilling. 

"This sector can also be seen as a high technology play, as  exploration and production firms are developing new methods for more efficient operations. New exploration technologies have dramatically cut down on dry holes and methodologies for extracting more production from existing well heads is constantly improving. The fund we like in this sector is Oil Service Holders Trust (OIH ASE). Some of their largest holdings are Baker Hughs. Halliburton, Transocean, and Schlumberger. This is a market predominated by a few large players. Hence the fund’s top ten holdings account for 78% of the fund value."

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