5 Lessons From Top and Bottom ETF Performers

Rudy Martin

With Labor Day here, summer is ending. It’s time to get serious about squeezing good results from the last four months of 2013.

Personally, I want to know exactly how things stand before I map a plan for the future. Today we’ll assess current market conditions by looking at recent Exchange-Traded Fund trends.

I made tables to show you the 12 best- and worst-performing equity ETFs (excluding leveraged and inverse funds) over the last three months. Take a minute to look at them now. What do you see?

We’ll start with the best …

The two lists show five important stock market lessons. Keep these in mind as your portfolio says hello to September.

LESSON 1: TECH & CHINA HOSTED THE PARTY

Technology sector ETFs account for half of the top 12 list. The three-month performance leader, PowerShares Golden Dragon China (PGJ), has 62% of its assets allocated to technology and telecom, so it is essentially a tech ETF as well.

Global X Nasdaq China Technology (QQQC) and Guggenheim China Technology (CQQQ) also show China and tech have been a good combination lately.

China found other ways to win, too. Third-place Global X Social Media (SOCL) has a 28% commitment to Chinese stocks. (I mentioned this theme a few months ago in 2 Economies, 1 Country.)

Tech continues to show impressive momentum. The trend also has stamina, as shown by the ETFs with better than 40% one-year gains. PowerShares Nasdaq Internet (PNQI) missed by only a slim 20 basis points.

LESSON 2: DON’T COUNT OUT GOLD JUST YET!

While gold stocks had a sharp spring sell-off followed by modest recovery, gold bullion is roughly where it was three months ago. Silver did much better over the period.

Nevertheless, Global X Gold Explorers (GLDX) and the Global X Silver Miners (SIL) pushed higher. Double-digit percentage gains put them in the top-12 ETF performer list.

The positive three-month and one-month returns represent major reversals for these two. GLDX and SIL are still far below their peaks, down 47.69% and 24.43%, respectively, over the last year.

LESSON 3: ENERGY ACTION IS ON THE ALTERNATIVE SIDE

TAN and FAN sound like great Labor Day weekend activities. Those who lament high-summer utility bills should be glad to see Guggenheim Solar (TAN) and First Trust ISE Global Wind Energy (FAN) on the top-12 ETF list.

While TAN eased fractionally over the past month, FAN managed a 7.78% gain for the period. Both alternative energy ETFs surged more than 50% over the past year.

The absence of traditional energy plays from the leader list, combined with bullish wind and solar action, has me taking the alt-energy sector a bit more seriously. How about you?

LESSON 4: REGIONAL BANKS ARE OUTPACING THE GIANTS

The financial sector often starts flexing its muscles at this point in the economic cycle. This time, however, the too-big-to-fail megabanks face mortgage loan scandals, London Whale losses and Dodd-Frank constraints.

Now, ETF investors seem much more interested in regional banks.

PowerShares KBW Regional Banking (KBWR) and SPDR S&P Regional Banking (KRE) both gained roughly 15% over the last three months and are up well over 30% from their year-ago levels. Caution lights are flashing, though: Both regional banking ETFs slipped fractionally in the last month.

LESSON 5: EMERGING MARKETS LOOK WEAK — EXCEPT FOR THE BIGGEST PLAYERS

If you search for positive numbers in the Worst ETF table, a magnifying glass — or even a microscope — won’t help. The same goes if you look for anything other than an emerging-market ETF among the dozen worst three-month equity ETF performers.

Fact: I could have extended to show the worst 26 equity ETFs for this period — and it would still show nothing but emerging-market funds!

Easy conclusion: Emerging-market stocks have been horrible! Even more depressing: In most cases, half or more of the three-month implosions occurred in the last month.

Not too long ago, investors were enamored with the endless potential gains in BRIC (Brazil, Russia, India and China) stocks.

Now only China appears on the winning roster … when combined with technology. Four of the 12 worst three-month ETFs represent India. Three more cover Indonesia. Asia doesn’t look so hot, but Brazil has four of the worst performers, too.

Notice also how six of the worst ETFs are small-cap plays. This should teach us a lesson: Don’t mix your anticipated pleasures. Emerging-market investments are potentially rewarding but also risky right now. Mix that with small-cap stocks, and the combination amplifies risk as well as opportunity.

On the brighter side, every trend eventually ends. I see glimmers of hope in the emerging markets.

  • Europe’s economy is finally showing signs of life …
  • We have some positive signals from China …
  • As well as some encouraging U.S. economic data.

Demand for materials, agricultural output and manufactured goods from emerging markets could create a sharp reversal in emerging markets. I’m not buying just yet, though. The currently depressed prices may represent great values, but reaching for them too soon is like trying to catch a falling knife.

These are the kind of choices I make daily as editor of Global Trend Trader. Research dominates my waking hours, but I’m working hard for my subscribers.

With these five lessons, you’re better equipped to make good decisions, too.

Good luck and happy trading!

Rudy Martin