ETFs at the Right "Price" ...

10/15/2004 12:00 am EST


Price Headley

Founder and Chief Analyst,

Price Headley may be best known for his short-term trading strategies and technical expertise, but he also does an excellent job at uncovering long-term opportunities. Here, the advisor looks at the best longer-term plays among exchange traded funds.

"There’s been little respite from the choppy and mostly directionless trading this summer. And frankly, that’s not such bad thing for longer-term investors: It can drive traders with a short-term time horizon crazy, but if you’re positioning yourself for secular (i.e., long-term) shifts in market leadership, then this kind of movement shouldn’t be a big cause for concern.

"We’ve seen a remarkable rebound for interest-rate sensitive sectors, particularly among Real Estate Investment Trusts (REITs). The big story  is that the market seems to be telling us that given the murky economic picture, the Fed's 'gradualist approach' to rate hikes might just be right approach for the time. And in light of that, securities whose attraction relies heavily on income like REITs, along with stocks that rely on mostly predictable interest rate trends such as banks, would be perceived beneficiaries. Some of favorite stock plays here include big names like JP Morgan Chase (JPM NYSE), as well as smaller regional banks. You might also consider a ‘basket’ exchange traded fund play like Regional Bank Holders (RKH ASE). In the REITS sector, we also suggest iShares Cohen & Steers Realty Majors (ICF ASE).

"We’re going back to the proverbial well. The oil well, that is. We like iShares Goldman Sachs Natural Resources Index Fund (ICF ASE). The conventional wisdom says oil prices are set to tumble and OPEC is doing all it can to increase production to that end. But given the situation in Iraq, and recent inventory data in the US, we’d say the supply outlook remains cloudy enough to keep a premium price on oil. We’re betting that fundamental trends and the seemingly ever-present, so-called 'terror premium' is here to stay. What’s more, as a natural resources fund, this ETF also boasts considerable holdings in basic materials (about 20%, including forestry products), which have resurgent lately. Top holdings of this exchange traded fund include Exxon, Schlumberger, Alcoa, and International Paper.

"In addition, the iShares S&P 500/Barra Value Index (IVE ASE) offers a unique way to ‘blend’ some of the strongest sectors in our current industry rankings. The top holdings of this ETF include energy heavyweights like Exxon Mobil and Schlumberger as well as basic materials firms such as Alcoa, all of which stand to benefit from rising energy and commodity prices.

"Latin American shares have been on an absolute tear since bottoming back in May, and we like iShares S&P Latin American 40 Index Fund (ILF ASE). In the wake of a relatively uncontested recall vote in oil-rich Venezuela, this is also a play on the global economic recovery and energy demand. Also, too, consider the fact that the aggregate p/e of this Latin American ‘blue chip’ fund is just 12, an understandable discount to US peers, but a potential opportunity to buy growth in this region on the cheap. But this move is also driven by the index’s move to take out prior highs, in which case we could see more upside momentum.

"We also like StreetTracks Dow Jones US Small Cap Value (DSV ASE). Given this exchange traded fund’s namesake slice of the stock market, it’s no surprise that’s it been one of the best places to keep your money (or trade) in the past few years. Reams of academic research support the case that small-cap value (simply put) is the best-performing asset class/style category over most extended periods of time. However, we lightened up positions in DSV in both portfolios some time ago due to this fund’s inherent sector bias toward financials and real estate: We’re definitely contrarians, but we wanted to lighten up on those areas in anticipation of the market’s initial reaction. Now that the Fed appears to be hewing to its promise of moderate rate hikes, it’s safe to expand our small-cap value stake.

"For more aggressive investors, we also like Internet Holders (HHH ASE). Lately, the sector has been on an absolute tear. This is a sector that tends to get a pop in the fourth quarter. The Internet sector, particularly online retailers, has become the poster child for year-end rallies, as secular trends in retail have spurred big sales gains for these companies at holiday. So from that standpoint, it’s never too early to start thinking about Christmas. At this point, given expectations for a strong holiday season for online retail we could see an earlier than usual pop up in shares of top holdings like eBay, Amazon, and Yahoo! Sure, these companies face challenges in a tough economic climate, but these companies have also maintained torrid growth that their offline retail peersand their technology brethren must certainly envy."

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