I Still Like This ETF…
We’re taking a look back at a trade I recommended in the Sector ETF Trader last year. I’d like to show you how we profited so you can do the same in the future.
What prompted this idea?
Just a few days ago, I was reading one of the many financial magazines that come across my desk. I came across an article on the different Basic Materials ETFs available.
Of course, I was curious to see which one they would recommend. However, they didn’t even recommend one. Instead they just gave a list of the top eight for the reader to choose from.
I hate financial writing that doesn’t step up and give an opinion. My thoughts are usually along the lines of… Wow, don’t hurt yourself with that hard hitting analysis.
What really shocked me was what they left out. They didn’t even mention the best performing ETF in the sector! Just ask any subscriber to Sector ETF Trader who pocketed an annualized gain of 68% with this ETF.
Call me crazy, but I think you should include the best performing ETF in a discussion about the sector.
And to top it off, I think this ETF is still a great investment… I’ll tell you why in a minute.
First, the skinny on the trade we made in Sector ETF Trader.
As many of my subscribers know, the basic premise of a sector rotation strategy is simple. Certain sectors will have better returns at different points in the business cycle. And our proprietary technical analysis is designed to pin point the best ETF to maximize profits from this rotation.
Back in June of last year, the stock market was in the midst of three month rally. Government stimulus programs around the globe were just getting under way. And China was buying commodities left, right, and center.
It was clear governments around the world were pulling out all the stops. Their plan was to put an end to the economic collapse by spending enormous sums of money on infrastructure projects.
One thing infrastructure projects require is massive amounts of raw materials. The ETF I found to profit from rising demand of these basic materials is the SPDR S&P Metals & Mining ETF (XME).
XME holds 27 stocks in the basic materials sector. They were in a specific subsector sure to benefit from infrastructure spending. That’s why this ETF’s been able to outperform the broad basic materials sector.
As you can see, XME rocketed toward our price target over the next few months. It netted subscribers better than a 31% gain in less than six months… That’s an annualized return of 68%!
Now let’s fast forward to today…
The highly cyclical basic materials sector has posted some of the biggest gains of any sector over the last year. Part of the reason the sector has made such huge gains was the huge losses it took the year before.
The best way to measure how much the current rally has erased the previous fall is Fibonacci Retracements. Take a look at XME and the broader sector ETF the Basic Materials Select Sector SPDR (XLB)
You can see XME is up from $17.15 in November of ’08 to $56.54 as of yesterday. That’s an enormous gain of almost 230%. But it’s only retraced 50% of the losses from the high to the low in ’08.
You can see XLB is up from $17.83 to $34.05 as of yesterday. That’s an impressive gain of 91%. But it’s retraced about 61.8% of the losses.
Let’s put it all together. This data’s telling me the metals and mining subsector is even more sensitive to economic changes than the rest of the basic materials sector. It falls more when times are bad but it also gains more when the economy is growing… like it is right now.
The fact that XME’s only regained 50% of its losses from the peak in ‘08 tells me there’s bigger upside potential in XME than in the broad basic materials ETFs.
If you’re optimistic economic growth will continue in 2010, take a look at the basic materials sector and more specifically the metals and mining group. It should be one of the strongest sectors. Remember, by digging deeper and focusing on sub-sector ETFs, you’ll have the potential to maximize your profits.
Category: ETFs
