This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Using Market Signals to Get an Overbought ETF at a Better Price

NEW YORK (ETF Expert) -- The more investors get discouraged by low-yielding Treasuries, the more they've chased assets that are further along the risk ladder.

For example, one month earlier, iShares Investment Grade Corporate Bond (LQD) had a trailing 12-month yield of 4.1%. After a month-long surge in buying activity, however, LQD is yielding closer to 3.9%.

Granted, 3.9% may still be an attractive yield to income enthusiasts. Nevertheless, when an ETF goes on a vertical trek that puts it into overbought territory by several measures (e.g., RSI above 70, deviation above a key trendline, etc.), the asset is likely to cool off.

Let the air deflate from LQD's balloon a bit before acquiring additional shares. A period of flattening out or depreciation of 2% to 2.5% would do the trick.

Yield-hungry investors have been equally cavalier about pursuing preferred stock shares. Unlike common stock, preferreds pay fixed dividends that will not fluctuate. They are the "hybrid cars" in the investment world -- paying a fixed rate of return like a bond instrument and having capital appreciation potential like common stock.

The big problem with preferreds? Roughly three-quarters of them are issued by the financial sector. It follows that concerns about the global financial system have made this asset class far more volatile than in years prior to 2008.

The chart below shows just how quickly investors abandoned iShares S&P U.S. Preferred (PFF) in May-June, and how enamored others became in the dividend days of June-July.

Here, I have two suggestions for the yield-famished. You might choose to wait for an inevitable "risk-off" period where concerns about European countries or European banks cause profit-taking in PFF. Or you might consider the newly launched Market Vectors Preferred Excluding Financials Portfolio (PFXF). The latter may take some of the volatility sting out of preferred share investing, but may also present a less attractive annual yield.

Finally, we have one of the most successful asset classes in 2012: mortgage REITs.

These companies borrow money at ultra-low short-term rates, then invest in mortgage-backed securities. They profit from the spread between their borrowing rate and the mortgage-backed security rate. As long as the spread remains favorable, "mREITs" tend to do well.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,086.63 -26.91 -0.16%
S&P 500 1,987.01 +3.48 0.18%
NASDAQ 4,473.6970 +17.6810 0.40%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs