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Three ETFs Ready To Rebound
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IHF, WLP, AET, UNH, NLR, EWD, IAK, AIG, EWM, PCXIHF, PCXIAK, PCXEWD, PCXEWM
In the shadow of Tuesday's market disruption, I have to wonder if the last two months worth of rally is getting ready to cool off. If so, it may be a decent time to get off the well-beaten path of domestic stocks and start to wade into the waters of obscurity.
While there are a handful of individual stocks I have in my back pocket, three exchange-traded funds (ETFs) have captured my attention as possibly wiser alternatives. All three seem to have experienced hyper-aggressive selling, but are now working on a recovery effort. (Check out Advantages Of Exchange-Traded Funds.)
In my search, I also found two ETFs I specifically don't like right now. We'll examine those after.
Worth a Look
iShares Dow Jones Healthcare Providers Fund (PSE:IHF)
My ongoing search for undervalued ideas immediately led me to the healthcare sector. This fund lost about 25% of its value between January and April, but has also rallied more than 15% off of March's low of $42.97. What's driving the strength? Surprisingly, it's not the ETF's biggest holding, UnitedHealth Group (NYSE:UNH). It's Wellpoint (NYSE:WLP) and Aetna (NYSE:AET) that are taking on most of the burden, along with the fund's smaller holdings.
Market Vectors Nuclear Energy ETF (AMEX:NLR)
As convenient as it may seem, no, this is not an anti-oil, "gas is too high" idea. This is a "this ETF is rising" idea; NLR is up 22.8% from March's low, but still has room for more upside before prior highs are met again. The one characteristic I don't particularly care for with this nuclear energy ETF is that there's no pure nuclear energy company to own. All the holdings have nuclear energy as only part of their power sources. Still, the fund is starting to get traction again.
iShares MSCI Sweden Index ETF (PSE:EWD)
What's not to like about being 28% above January's lows, expect for maybe the remaining 18% worth of potential gain before running into last year's highs? What about the underlying stocks? What little information there is about the collective group is solid – by U.S. or Swedish standards. I'll take an average price-to-earnings ratio of 11.5, and a price-to-sales ratio of 1.15, any day of the week. If it gets me out of nothing but American equities in this tentative time, so much the better.
Two ETFs to Avoid
iShares Dow Jones U.S. Insurance Index ETF (PSE:IAK)
The sell off earlier in the week isn't catastrophic. The red flag here is how the insurance industry had been selling off since early May... while the rest of the market was rallying. The fund is largely being guided lower by its biggest holding, AIG (NYSE:AIG). The insurer recently raised $20 billion I new capital, not because it wanted to, but because it had to. The alternative would be to face a write-down crisis that could create insolvency.
The unfortunate part is that fundamentally, other insurers appear to be on solid footing. I don't think AIG's woes are going to be wiped away with an extra $20 billion on the books though, which means the entire ETF is a liability.
iShares MSCI Malaysia ETF (PSE:EWM)
It was only a few weeks ago I was singing this ETF's praises. The fund's price nearly doubled between mid-2006 and early 2008, then it fell 17% off its high. The culprit was political turmoil, though the term doesn't do justice to what's going on there.
While it may be tempting to jump on an undervalued investment, I feel EWM has been devalued appropriately relative to ongoing risk the county represents.
Parting Thoughts
Though I posed three ETFs as alternatives to a possibly-sinking U.S. market, the nice part is their strength is not predicated on U.S. stocks' weakness. I found these exchange-traded funds based on their independent strength. If the U.S. market rights itself before getting too far underwater, these funds could still do quite well
For more on exchange traded funds, see 3 Steps To A Profitable ETF Portfolio.
While there are a handful of individual stocks I have in my back pocket, three exchange-traded funds (ETFs) have captured my attention as possibly wiser alternatives. All three seem to have experienced hyper-aggressive selling, but are now working on a recovery effort. (Check out Advantages Of Exchange-Traded Funds.)
In my search, I also found two ETFs I specifically don't like right now. We'll examine those after.
Worth a Look
iShares Dow Jones Healthcare Providers Fund (PSE:IHF)
My ongoing search for undervalued ideas immediately led me to the healthcare sector. This fund lost about 25% of its value between January and April, but has also rallied more than 15% off of March's low of $42.97. What's driving the strength? Surprisingly, it's not the ETF's biggest holding, UnitedHealth Group (NYSE:UNH). It's Wellpoint (NYSE:WLP) and Aetna (NYSE:AET) that are taking on most of the burden, along with the fund's smaller holdings.
Market Vectors Nuclear Energy ETF (AMEX:NLR)
As convenient as it may seem, no, this is not an anti-oil, "gas is too high" idea. This is a "this ETF is rising" idea; NLR is up 22.8% from March's low, but still has room for more upside before prior highs are met again. The one characteristic I don't particularly care for with this nuclear energy ETF is that there's no pure nuclear energy company to own. All the holdings have nuclear energy as only part of their power sources. Still, the fund is starting to get traction again.
iShares MSCI Sweden Index ETF (PSE:EWD)
What's not to like about being 28% above January's lows, expect for maybe the remaining 18% worth of potential gain before running into last year's highs? What about the underlying stocks? What little information there is about the collective group is solid – by U.S. or Swedish standards. I'll take an average price-to-earnings ratio of 11.5, and a price-to-sales ratio of 1.15, any day of the week. If it gets me out of nothing but American equities in this tentative time, so much the better.
iShares Dow Jones U.S. Insurance Index ETF (PSE:IAK)
The sell off earlier in the week isn't catastrophic. The red flag here is how the insurance industry had been selling off since early May... while the rest of the market was rallying. The fund is largely being guided lower by its biggest holding, AIG (NYSE:AIG). The insurer recently raised $20 billion I new capital, not because it wanted to, but because it had to. The alternative would be to face a write-down crisis that could create insolvency.
The unfortunate part is that fundamentally, other insurers appear to be on solid footing. I don't think AIG's woes are going to be wiped away with an extra $20 billion on the books though, which means the entire ETF is a liability.
iShares MSCI Malaysia ETF (PSE:EWM)
It was only a few weeks ago I was singing this ETF's praises. The fund's price nearly doubled between mid-2006 and early 2008, then it fell 17% off its high. The culprit was political turmoil, though the term doesn't do justice to what's going on there.
While it may be tempting to jump on an undervalued investment, I feel EWM has been devalued appropriately relative to ongoing risk the county represents.
Parting Thoughts
Though I posed three ETFs as alternatives to a possibly-sinking U.S. market, the nice part is their strength is not predicated on U.S. stocks' weakness. I found these exchange-traded funds based on their independent strength. If the U.S. market rights itself before getting too far underwater, these funds could still do quite well
For more on exchange traded funds, see 3 Steps To A Profitable ETF Portfolio.
by
James Brumley
James Brumley is a freelance writer and registered investment advisor. He began his career as a broker with a major Wall Street firm, where fundamentals and long-term holding periods were core strategies. After that, he switched gears completely, becoming an analyst at a short-term trading newsletter that focused on technical analysis. He now manages client money using the best of both philosophies. His company, Bluegrass Portfolio Management, offers investors an opportunity to reap superior returns with minimized risk.
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