Two ETFs the Big Money Still Likes

08/30/2010 10:40 am EST

Focus: ETFS

Peter Way

Founder and CIO, Peter Way Associates

Peter F. Way, editor of Block Traders’ ETF Monitor, says the biggest market makers are pretty cautious these days, but they still like two ETFs for future price appreciation.

Each day we monitor the self-protective actions of market-makers as they take the temporary at-risk investment positions necessary to conduct the activities earning their firms eight- and nine-figure daily profits, and seven- to nine-figure annual individual salaries and bonuses.

What these knowledgeable and experienced professionals will pay to protect and achieve those gains tells just how far, both up and down, the prices of the specific securities are likely to move in coming days, weeks, and months. We aggregate those percentage-change expectations into an overall detailed picture that has implications for the market as a whole.

We look to be much closer to a market low than a peak, and with lots more recovery potential than any restricted gains implied by professional concerns in an overbought market.

But as we cautioned, investor thinking is not symmetrical when it comes to risk and return. The “what, me worry?” present posture is even more extreme than a prior Standard & Poor’s 500 that was almost 50% higher than the current index.

The “whistling past the graveyard” is getting deafening. What it will take to turn bravado into terror, producing downside extremes like those seen in March a year ago, is yet to be revealed, but the potential for that effect is clear.

Behavioral scientists have long known that investors are moved more strongly by fear than [by] greed. We are more disturbed for the market’s near future by [the current sentiment] than we are reassured. It is reflected in the small number [of exchange traded funds] being recommended as Buys.

That compares to the dozen or more typically winnowed out as the best of many more offering the 22% a year rate of risk-balanced return we take as a minimum.

iShares MSCI EAFE Growth Index ETF (NYSEArca: EFG) holds EAFE index stocks categorized as growth issues. The exotic appeal of an import may be behind the attraction that places EFG ahead of 92% of our 2,200 stock & ETF population, ranked on a demonstrated return vs. risk scale.

True, its 6% [recent projected] up side is not big, but with an historic average +10% gain following up-side-to-down-side forecasts like the present, it may be big enough for the Sell target to be reached.

iShares S&P US Preferred Stock Index (NYSEArca: PFF) is an ETF holding high-yielding preferred stocks. In addition, its price has sufficient variation that from time to time it also appears with enough capital gain potential to meet our minimum. Now is another one of those times. Besides the price play potential, the current yield is [under 7%,] paid in monthly increments, making it an income-seeker’s favorite.

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