The performance of the average ETF globally last month was up 6% last month, but this hides the fact that the top ETF funds actually had much higher returns -- an average 11% for the month.
Taking a closer look at the funds normally available to U.S. investors, I put together a watch list portfolio of 10 funds to see if using a momentum strategy in the next six months might generate excess returns above the normal U.S. and global market indices.
Here's the list of the hottest ETF funds last month and where you might find some of next month's top performers.
Take a closer look at what's in the theoretical $25,000 portfolio of ETFs. I created the above watch portfolio at
, an online broker that offers flat-fee trading. You can find an easier to use service, like
, but with a little help from their customer support and some patience I was up and running in a short time.
Here in ticker order are the top 10 ETFs for this project.
1. First on the list is
PowerShares DB MultiSector
. This fund tracks three commodity contracts on the London Metals Exchange. The futures contracts are for copper, aluminum and zinc. In a
. I highlighted the investment outlook for steel and the story is much the same for these other metals. Again as detailed in the report, the next 24 months may be one of the best periods to invest in basic-material stocks.
2. Next is
ProShares Ultra Oil & Gas
, which invests in the integrated oil companies. The top three holdings
represent 45% of the portfolio. This ETF aims to generate returns that are twice those of the DJ Oil & Gas Index. With oil hitting $105 per barrel last week and the rapid movement in oil prices, DIG should surely move higher in the near term.
iShares MSCI Brazil
is my favorite ETF and I continue to recommend it. Two high quality companies, PetroBras and Vale represent almost half of the portfolio. But during the last three months this ETF has traded sideways, dropping from the low $80s to $70 in January on concerns of a U.S. slowdown, then hitting a new $88 high in February on the iron-ore price increases before retreating on profit-taking.
Fortunately, the underlying trends in Brazil remain positive and as spelled out in my sector report the fundamental forces are very long term in nature. In addition, on a company by company basis the financial picture for the two largest holdings in this fund continues to improve. I suggest that the best approach with this one is to watch it and buy on dips.
4. If you want a broader Latin American fund, check out the
SPDR S&P Emerging Latin America
. In contrast to other Latin regional ETFs, 15% of this fund is invested in countries other than Brazil and Mexico. There is no escaping the fact that the largest industry sector in Latin America is the very hot material stocks. These represent 25% of GML holdings.
Note that the next largest concentration in this ETF, 17% of the fund is invested in financial stocks such as
. As Brazilian companies repatriate earnings, the financial institutions that serve them should also do well. Unlike the weakened U.S. and European financials, the Latin banks are doing well and believe it or not are even announcing acquisitions and new ventures. This good performance should fall to the bottom line and help overall returns for the GML investors as well.
iShares DJ US Oil & Gas Exp & Pro
proves it's not just the refiners that are seeing the benefits of higher prices. IEO's valuation surged 21% in just one month alone. The IEO fund includes companies such as Occidental Petroleum,Valero Energy, Devon Energy, Apache Corp., Anadarko Petroleum that are engaged in the exploration for and extraction production refining and supply of oil and gas products.
6. Half of the
iShares S&P Latin American 40 Index
is invested in materials and energy stocks. The low 50-basis-points expense ratio and a solid five-year average return of 52% are two other very compelling reasons to own this one as a core holding.
For those who need a refresher lesson in compound growth math, this 52% means that if you invested $25,000 on Jan. 1, 2003, you could have seen the value grow to over $135,000 in five years, just on this one investment alone. With funds like this one anyone can invest and beat the Wall Street pros.
7. Not all funds follow the market downward as shown by the
iPath DJ-AIG Industrial Metals TR ETN
. This commodities fund has 13% of its portfolio in nickel and what appears to be a low correlation (0.28) with the S&P 500, which should translate into a more defensive investment if the general U.S. and global equity markets head downward. For more information about commodity-sensitive funds visit iPathETN.com and check out the different types. In addition to the metals, you will also find more information on even agricultural ETFs. With the price of corn and food going up, commodity funds may be the best inflation hedges for the future
By now some of you may be tempted to add a conservative growth stock fund to the mix -- like
Fidelity Magellan Fund
, which is again open for new investments. Granted there may be other Fidelity funds to consider but according to the Fidelity web site the life return of the Magellan Fund is 18.06% primarily from the good performance decades ago. Nowadays year-to-date performance was a loss of 13.37% as of March 7, 2008. Times have changed since the Magellan fund was the leader and the new ETF vehicles like the ones presented here should allow you to directly tap in to new markets and investment vehicles that were not possible decades ago.
My advice is to stick with what those funds that are working in the market and presenting positive surprises. With that said, here are three more basic materials ETFs to consider for your new portfolio.
Market Vectors Steel Index
is all about steel. Factoid: Last year SLX returned 84% -- no kidding. This prize-winning fund includes common stocks and ADRs of selected companies involved in the steel industry of all sizes. With only 30% of the portfolio in U.S.-based companies, this is primarily a play on the emerging markets.
In addition to the main two Brazilian plays (RIO and Vale) it also contains Russian company Mechel, Indian leader Arcelor Mittal and Asian producers such as POSCO. Of all these holdings in this fund,my personal favorite is Gerdau, which owns 65% of Gerdau Ameristeel and sells at a 25% to 35% cash flow discount to its peers. A free sample report on Gerdau is
ProShares Ultra Basic Material
. The Fund invests at least 80% of its assets in equity securities or financial instruments including derivatives that its Fund manager believes, will produce twice the daily return of Dow Jones U.S. Basic Materials Index.
Again by now you should understand the Ultra label designation, and that any fund that aims for 200% of an index return is not likely to be a sleeper. It will move quickly up or down. This one is probably best for the quick traders. While last month's gains put this among the top funds, year to date the fund generated a loss of 4%.
10. The last on this list is
SPDR S/P Metals / Mining
. This one reminds us to not forget coal stocks. These are well represented in XME's top holdings of Consol Energy, Peabody Energy and Arch Coal. These three coal stocks represent 15% of the overall portfolio's market value.
Will this basic "from the ground up" approach work again?
One final word about the back tested performance of this strategy. By definition this group of funds gave a stellar return last month. There is no guarantee that this will be the same list of funds next month. But the amazing thing about this is that the 10 ETFs presented here would have beaten the S&P 500 by a wide margin over the past 12 months as well. Take a look below at the 41% return from these ETFs versus the 6% loss.
There was a whopping 47% difference in returns for the last twelve months. With the magic of compounding on your side, hopefully you will find yourself building a next egg with funds like these instead of watching balances dwindle in cash or the average stock.
I look forward to hearing your comments and experiences with these ETFs.
Growth of hypothetical $25,000 investment - Back test
Rudy Martin is the former director of research for TheStreet.com Ratings.