Industrial revolution again ?

Looking at the world of ETFs and trying to discern trends - one sector that stands out is the industrial sector. The ETFs that represent the industrial sector well are XLI, ITA, IYJ and PPA. PPA ETF also includes the aeronautic sector too. Looking at XLI chart,

it has been quite bullish this year - returning nearly 13 % year to date and a big chunk of it - about 4 % - just during last one week. Underlying stocks which move the industrial index are very strong with even a super jumbo stock like GE moving nearly 3.2 % up today. Talking of super jumbo jets, the apparent reason for the move being that GE is the big winner from the Paris air show where Boeing and Airbus bagged several billion dollar orders and to whom GE is a big vendor.

Some speculate the real reason for the strong showing by the industrial sector is due to the industrial revolution - happening in China, India and other emerging markets. Companies in the industrial ETFs are the biggest vendors of industrial equipment in these markets. Also, for the US based industrial vendors, it really helps that the dollar is weak and being the "low cost" vendor for a change. The profits when converted to dollars helps in higher earnings and since profits is what that moves markets, even a super jumbo stock like GE.

I think one can say that today was an anti-dollar day with gold ( GLD ) and euro ( FXE ) both moving up. Oil ( USO ) has been on rally lately - one cannot be sure if it is a rebound or just a bounce. The energy ETFs like XLE and OIH have been on a tear lately and performing quite independently of the underlying commodity itself. Comparing XLE, OIH and USO, one observes that XLE, stocks-based energy ETF, is up 21 % and oil service holders, OIH, is up 29 % year to date although the underlying oil commodity (represented by USO) is up just 1 % year to date. This disconnect between the energy stocks and oil commodity is quite amazing. One reason, is that although the oil commodity has not been great performer, the energy stocks are performing much better as the oil price is high enough for oil producers to invest in exploration and with literally no new refining company being started, the refining margins are driving huge profits at the "big oil".

The global markets have been having a silent rally going back to the recent highs (before the so called bonds plunge). The Chinese ETF (and Chinese ADRs like PTR, CEO) have been on a tear and analysts are back to using the bubble word. But folks say that investing in China now is like investing in US back in the industrial revolution days. But hey, Petrochina's market cap is about 255 Billion which is valuation more from "dot com" age than that of "industrial revolution" .

To wrap up, here are few spotlight charts ..

Emerging markets have not heard the news

While all the other ETFs (like SPY, QQQQ, DIA) are struggling, the emerging markets apparently have not heard the news about bonds plunge (see TLT below).

EEM, emerging markets ETF, was up a percent and more.

The latin american ETFs still have the momentum (with ILF up three points) and the chinese ETF managing nearly a one percent gain. We have to see if they break new highs (or this will end up becoming right shoulder of the heads and shoulder - nothing to do with shampoos and conditioners - technical formation which is a bearish indicator).

On a weekly basis, among US ETFs, some of the ETFs which show the most gains are the double short ETFs like MZZ, TWM. If one really looks closely at Midcap short ETF, one can make out a small reverse heads and shoulder (means bullish for the bears - never heard anyone use the phrase "bullish for the bears" before :-) ).

Bonds, Bonds & Bonds

Ok, we are not talking baseball here (sorry baseball fans, wrong blog). The story last week (and the slight weakness that we finally saw in the financial markets) was attributed to bond yields rising. The trends of various bond ETFs (TLT, TIP, SHY and the rest - you can find more Bonds ETFs coverage here has been down this year. The long term bond exchange traded fund, TLT, has taken one of the larger tumbles this year (down nearly 5 %) with the TIP (iShares treasury inflation protected) and SHY taking less of a hit. The reasons are many - some go with conspiracy theories that the chinese are dumping US treasuries and others say that it is a reflection of no rate cuts this year (some even speculate an increase in rates).

What ever the cause that might be, it gave the bulls to take a bit of rest and take their well deserved profits. Well deserved ?, yes, they kept this bull run going for so long. The bears finally got a bit of respite. The inverse or short ETFs had their first substantial bounce that one can remember ! My website (I am a contributor and also one of the founders) has good coverage on short or inverse exchange-traded funds . These ETFs primarily go in the opposite direction of the underlying index. For instance, if one is bearish on S&P500 (SPY ETF tracks it), they can buy SH which moves inverse to the moves SPY makes. Now, if you are super pessimist, then you can go for SDS which moves twice as more in the opposite direction of SPY.

One would think that with SPY being one of the most popular ETF out there, that the inverse exchange-traded fund SH would be quite popular. As the market always surprises us, SDS, the double inverse of SPY has much higher volumes. Hey, if one does not like the market, why not bet the house ?

Taking a look at most popular top ten exchange traded funds, the Qs (tracks Nasdaq 100) and the emerging market funds, EEM, have good relative strength compared to other sectors and asset classes. OK, no prizes for the worst - going to bonds ETF, TLT, and the oil commodity fund, USO. Despite the oil fund doing not that great this year, the oil production and oil service stocks have been doing great. Here are some of the oil stock charts that one finds very interesting considering that USO is down nearly 5 % year to date. Some say that USO does not track oil commodity properly - well, that is for another blog. One commodity doing fine still is steel, SLX, giving a whopping 40 % return this year despite taking a bit of hit this week.

In the currencies market, nearly everything other than dollar has been doing great. But with yields going up and no near term rate cuts, it looks like dollar might rebound in the short term. Looking at the Euro FXE chart, one observes a small head and shoulder formation. So let us see if this technical analysis works out.

Top Ten Things That Every Active ETF Investor Needs to Know !

Well, we all like top ten lists! Here are ten issues that every active ETF investor and trader needs to know.

ETFs bring several never-before opportunities to investors and traders that were just not available before to an individual investor. Today, an investor and trader has control and flexibility and can invest across the globe and in literally every asset class (bonds to commodities to currencies) with nearly the same ease as trading and investing in stocks. Unlike mutual funds, you don't have wait till the end of the day to place your trade [and most mutual funds, if not all, don't really like active investors and traders]. With ETFs, one can trade anytime during the day and the investor has control.

But since ETFs are more of recent phenomenon [in terms of popularity] and hence one needs to be aware of the pitfalls too. From my experience, here are a few things to watch out for [especially for active investors and traders]:

Costs, costs, costs - well, your profits depend on them:
One can say the costs of ETF investing and trading has three components -1. Broker commission to buy and sell, 2. Expense ratios and 3. Difference between the bid and ask. Let us go one by one -

1. Most media is fixated on ETF investing commission costs compared to mutual funds. If one is doing active trading with ETFs [or even with stocks], there are several discount brokers who offer 1$ commission fees per trade [usually per 100 shares]. It is always a good idea to average down or up in chunks and low cost discount brokers will help keep your trading costs low.

2. Regarding expense ratio, yes, it is a issue if you are holding it for long period (think years). Most ETFs have very low expense ratios which is what made them attractive in the first place. For active investors and traders this is less of an issue since the holding period is short and other issues like market and sector trends are more decisive. For instance, ILF, the Latin American ETF has returns of about 28 % year to date! Hence, expense ratios should not hold one back and one should consider expense ratios within overall perspective.

3. Regarding difference between bid and ask, yes, there can be a big difference especially for exotic ETFs. Use limit orders to get the price you want. Or trade using the popular ETF Lists located sites like ETFSpot.com , where one can find popular ETFs. For most ETFs which trade on high volumes, the differences between bid and ask are not that substantial. But always check before you trade and definitely use limit orders.

So,yes, there are definitely cost issues with ETF investing (in comparison to mutual fund investing) but they are not as critical as media makes them out to be.

4. Volume: Always check the volume of ETF that you plan to buy or sell. Lack of trading volume does not necessarily mean lack of liquidity of the ETF but it rather means that it might take a bit of time for your trade to execute.

5. World ETFs: ETFs are god given for those who wanted to invest or trade in foreign equities. But watch out for currency effects. Check the trends of currency or ForEx ETFs to make sure they are moving in the right direction as your investment.

6. Too much choice: Some folks say there are just too many ETFs and too much choice is bad for the investor. Uh ? Too much choice means the investor or trader has to spend some time in researching them. Use various ETF information websites or wikis to learn and go top down from the popular ETF lists to lesser known ETFs.

7. Doubling up: Yes, now there are ETFs which try to double the returns on the index it follows. If you are sure of the market trend then it is all fine. But if one gets caught in a downdraft, simple arithmetic will show that you will need higher percentage gain to offset your losses

8. Too much trading: Yes, ETFs gives you flexibility to trade in and out during trading hours. But as with anything in life, one should always use the given control and flexibility with responsibility. Most ETFs follow indexes and sectors and they usually make decent moves over days and do not make big moves in minutes or hours. So having a bit of patience is good and always give some time for your trades to pan out (of course, always use stop loss). Using daily and weekly charts rather than intraday charts for ETFs is a good start to acheiving this goal.

9. Don't assume: Not all ETFs can track their underlying indexes well - especially the commodity ETFs which rely on futures, derivatives, etc. So, for instance, if one is betting on oil or gold price going up, consider not just the commodity ETFs but also ETFs that invest in energy and mining company stocks [also one could bet on country ETFs like South Africa or Australia or Canada ETFs which have substantial holdings in materials sector]. Think outside the typical ETF sector box.

10. Analyze ETF trends for trading stocks: Coming down to it, what makes the ETFs move are the underlying index constituents [well, some folks say that the tail (ETF) wags the dog (underlying stocks)]. Most stocks move with their sector and market. At sites like ETFSpot.com, one can get view multi-charts of similar stocks [to an ETF and other way around]. If one can spot market and sector trends using technical analysis or fundamental analysis of ETFs then that makes the job of finding similar high performance stocks that much easier. As they say in real estate, it is better to buy the worst house in a good neighborhood rather than purchase the best house in a bad neighborhood. Use ETFs to help with all your investing!

Bond ETFs

If there were two highlights this week in the market, the first highlight- the emerging markets ETFs are rebounding especially those from the latin american markets. The second, the bond ETFs like TLT have been falling and seeing no respite. One can only guess the reasons - maybe investors are moving funds into more riskier assets like equities especially in overseas markets [not that US markets are doing bad - in fact, the small cap ETF IWM is now performing similar to its large cap ETF peers like DIA and SPY. The other possible reason might be that with decent job numbers, it does not look like the Fed is going to cut rates any time soon. This page has more details regarding various Bond ETFs and their performances

Latin American ETF (ILF) soars

Most of the focus regarding the BRIC (Brazil, Russia, India and China) ETFs has been on India and China, the latin american exchange traded funds ( http://www.etfspot.com/etfinfo/Latin-America-All-Stocks.php ) have been soaring this year. Meanwhile, the latin american ETF, ILF, has gone up nearly 28 % year to date ( this in comparison to chinese ETF FXI which is up about 3 % so far this year and the indian fund, IFN, is actually down year to date ). The charts show their recent performances (http://etfspot.com/etfinfo/equitychart.php?ARG=ilf,fxi,ifn ).