Six ETFs That Might Pay Off

02/04/2008 12:00 am EST

Focus: ETFs

Peter Way

Founder and CIO, Peter Way Associates

Peter Way, editor of Block Traders' ETF Monitor, recommends ETFs that cover areas of the market where informed professionals are focusing most. 

Because we continually track what some of the best-informed and most influential players think stocks should sell for, we can build a baseline of experience and tell you where today's relationship lies in the range of past conditions.

Over the past eight years since the turn of the century (some 2030 days) the average of today vs. possible "tomorrow" prices has been a modestly hopeful + 6.2% when over 2,000 widely held and actively traded stocks are examined daily. On the basis of a [four]- month outlook, that +6.2% translates to an annual rate of +20%.But in the range of emotions from "the sky is falling" to "let the good times roll", that relationship has been as low as -1% to as high as +28%.

Since we are comparing current prices to knowledgeable expectations, when markets get run to extremes, the relationships are usually inverse to the market experience. The highest expected price changes came after the 9/11 terrorist attacks, and the lowest were at recent market peaks in July 2007 with the Standard & Poor's 500 above 1500.

Where are we now? The bottom reached on Friday, January 18th, produced an aggregate market return expectation of +9.5%, upsides net of downsides. That's an annual rate of +44%.

The sky is not falling. Neither are return expectations. The market is getting ready to turn around. Experience of the past eight years says the worst, after periods like the present, is a further general market loss of -5 to -7%, which is likely to have gone away, replaced by the +9 to +10% gains above, in three months.

If you can take those kinds of tradeoffs, you need to be a buyer of stocks. Today. It doesn't get much better.

In the broad-based exchange traded funds that largely track market indexes, as usual, there are few that meet our hurdle rate for investing, a +5% expected net price gain in three months (+22% annual return).

Let's look instead at those ETFs which focus more narrowly on industries and sectors. Here we can find [many] that meet our minimum test.
[Both] the Vanguard Energy ETF (AMEX:VDE) and the First Trust Dow Jones Internet Index (Amex: FDN) are attractive buys.  Also consider the S&P Metals & Mining SPDR (Amex: XME) .

The other hot-bed of present ETF opportunity is among international and global funds [which] offer prospects at double our hurdle rate. They have a heavy focus on emerging economies. The iShares MSCI South Africa Index (NYSEArca: EZA) and the iShares MSCI Brazil Index (NYSEArca: EWZ) present attractive "odds and payoffs."

In the portfolio strategy cupboard, the Vanguard Mid-Cap Growth ETF (AMEX: VOT) puts up pretty good numbers and may be useful if it fits a style need in your portfolio.

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