With indexes near all time highs, lots of stocks and ETFs are looking good, at least on a short-term basis. But what about longer-term investments? Here is the technical outlook of the top performing ETFs over the last five years, but I've added in a few additional criteria so the funds are more likely to be "investment worthy." The first criteria is an expense ratio below 0.5%, which keeps the cost of owning the fund low. All the ETFs have assets greater than $150M, to avoid the possibility of the fund closing and forcing investors to re-allocate invested funds. A five year time frame was chosen to capture both short and longer performance, and it turns out all these funds have had greater than 13% returns over the time frame. That figure is actually quite impressive considering the massive sell-off that occurred in 2008 and 2009.
SEE: How To Pick The Best ETF
iShares Nasdaq Biotechnology (Nasdaq:IBB) is the top performing fund over the last five years, given the criteria. According to Reuters, it has $3.1B in net assets, a 0.48% expense ratio and a 18.47% return over five years. Despite about a 15% pullback in May and early June 2013, the ETF looks to be on the recovery path and the uptrend remains in tact. Technical projections place a target near $203, or about 14% higher from the current $178.40 level. In terms of risk, a drop back below $169 signals a further decline, but buying opportunities exist all the way down to $134. Below $134 though, the uptrend is unlikely to resume and I wouldn't expect to see new highs anytime soon.
iShares Dow Jones US Pharmaceuticals (NYSE:IHE) has $458.6M in net assets, a 0.47% expense ratio and a 17.88% five-year return. Over the last two years, getting into the fund at a "cheap" price has been nearly impossible as it continues to move higher, with pullbacks of more than 10% being exceedingly rare. The target for this ETF is $110, so I do think there is still more room to the upside. A drop below $98.83 (the June 6 low) means a further price slide is likely. From a longer-term perspective though, the fund is a buy all the way down to $84. If the price drops below $84, a downtrend is already likely underway though.
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Vangard Consumer Discretionary (NYSE:VCR) has $832M in net assets, an expense ratio of 0.14% and a five-year return of 14.48%. From a low of $52.47 in 2011 to a May 2013 high of $93.39, the uptrend continues to push on. Similar to the other ETFs mentioned prior, pullbacks have been minimal over the last two years, giving few chances to get in at a discounted price. The weekly chart shows a very sharp rise since 2009; this trajectory is unsustainable long term, but I still think a target of of $97 to $98 is possible this year. If the ETF dips below $88.64 (the June 6 low), it warns of a short-term price decline. Down to $81 I see the fund as a buy, but if it drops below that I'd avoid it or get out, since an even more severe decline is likely underway.
Unlike the sector funds discussed above, the Guggenheim S&P 400 Pure Growth (NYSE:RFG) is based more on a strategy. It only invests in S&P MidCap 400 companies with strong growth characteristics. The fund has $635.2M in net assets, a 0.35% expense ratio and a 13.06% five-year return. The target for the fund is $114 to $115. Price drops below $101, $97, $90 or $86 provide short-term warnings that further declines are underway. Due to the strong uptrend though, as long as the price remains above $81 this ETF is providing buying opportunities. Take a step back if a breach of $81 occurs, as downside risk becomes too great to warrant buying into a severely declining market.
SEE: Interpreting Support And Resistance Zones
The Bottom Line
With ETFs, fancy isn't necessarily better. These four funds offer low expense ratios and have been solid performers. When the market is rising, getting into an ETF such as a sector fund is a simple way to attain a basket of stocks that capitalize on market conditions. There is always the possibility of a correction or a big slide. Corrections represent buying opportunities in the uptrend, but if that correction drops too far, it warns that a downtrend is likely underway.
Charts courtesy of stockcharts.com
At the time of writing, Cory Mitchell did not own any shares in any company mentioned in this article.