The Diamonds Trust
ETF continues to hit new highs and draw attention to large-cap stocks. Over the last 12 months, ending with last Tuesday's surge, Diamonds Trust returned 18.5% vs. 18.6% for the
MSCI EAFE Index Fund
The market's rapid appreciation has also helped the
S&P 500 SPDR
, which posted a total return of 16.4% for the same 12-month period.
You can attribute this to U.S. merger-and-acquisition activity. Or you can attribute this to the relative strength of first-quarter earnings announcements, regardless of whether you believe in the analysts' estimates or currency accounting.
On the other hand, you could attribute this to investment money flows from ongoing share repurchases, as company managements attempt to put capital back in the hands of their shareholders. The net effect is that the large-cap stocks are catching up to global performance.
Caution! Catching up does not mean overtaking. Just look at small-cap U.S. stocks: The
Russell 2000 ETF
was up only 9% over the last 12-month period.
Our position as it relates to U.S. investments and small-caps has been defensive for some months now and remains so. Overhanging issues include falling residential housing prices, rising gasoline costs at the pump and slower corporate earnings growth. These conditions have not changed.
Although we have consistently stated that the U.S. economy is still strong, the ETF trends portfolio we present here has a strong international exposure. As a result, the ETF trends portfolio was also up 3.74% for April, but it lagged the 4.43% return from the SPY benchmark ETF.
The highlight of the month was the
iShares Natural Resources ETF
. The ETF benefited from the strong market for U.S. energy and refining stocks. Expectations of higher pump prices should translate into higher margins for the refiners.
representing leading positions in this ETF, it should continue to do well into the coming summer months.
Last month overall, the natural resources, utilities and aerospace/defense ETFs were the three leading contributors to April's performance, while the laggard holdings included materials and food/beverage ETFs.
At this point, TheStreet.com's Ratings coverage universe consists of 234 actively covered U.S.-traded ETFs. We added 12 new ETFs to coverage last month, as these investments reached the 12-month trading minimum required by our ETF and closed-end model. These new coverage additions included six growth-domestic, four equity-income, one growth-income and one sector ETF. There are now 449 ETFs in our total tracking universe.
So with all this action in the market, what are we missing, and how can we position the model portfolio for current trends? There are three changes we are recommending this month.
First, we're moving from a value-centric approach on international equities to a currency-centric one. To do this, we swap out of the
IShares MSCI Value Index
and replace it with the
DJ Euro STOXX 50
. We have been watching this ETF as a potential alternative for some time now, and the recent strength in the euro, relative to do the dollar, has now pushed this ETF into a potentially attractive future-return position.
EMU invests in 50 of the largest companies with securities in the DJ Euro Stoxx Index. Top stocks in the portfolio are also available as ADRs and include
Banco Santander Central Hispano
Unicredito Italiano Group
, power and gas company
E. On Ag
. The fund is 50% weighted toward financials and utilities and includes
, which now rank among the top five largest pending merger-and-acquisition deals.
Second, we are substituting the
State Street SPDR Utilities
in place of the
Merrill Lynch HOLDRs Utilities
. While HOLDRs may be attractive for building custom portfolios of stocks, the minimum secondary share purchase of 100 shares makes the Merrill Lynch ETF a difficult position to replicate in the real world for a small investor.
Third, we would like to capture higher growth with health care sector ETFs. Despite there being over 40 health care and biotech ETF options to chose from, it's hard to ignore the relative strength and performance of the health care stocks.
We are swapping out of the
Powershares Food/Beverage ETF
SPDR Health Care
. It's one of the largest ETFs in its sector, it has the classic low (24 basis points) expense load, it can be margined or shorted by more aggressive investors, and it even has options.
The leading positions in SPDR Health Care include
Johnson & Johnson
-- all Dow Jones Industrial components as well. With a 7.3% return in April, SPDR Health Care got away from us last month and can hopefully fuel better performance in May.
Finally, as this following chart shows, the Diamonds Trust ETF is now catching up with the international markets' performance. At the same time, there is a new headwind in the form of a stronger euro currency. It seems prudent to diversify and add exposure to both of these and adjust the balance, so that no matter which one wins, the overall portfolio value grows.
Diamonds ETF Gaining on Markets
Rudy Martin is the director of research for TheStreet.com Ratings. In keeping with TSC's Investment Policy, employees of TheStreet.com Ratings with access to pre-publication ratings data must pre-clear any potential trade through the legal department, and are prohibited from trading any security that is the subject of an unpublished rating revision until the second business day after the rating is published.
In keeping with TSC's Investment Policy, employees of TheStreet.com Ratings with access to pre-publication ratings data must pre-clear any potential trade through the legal department, and are prohibited from trading any security that is the subject of an unpublished rating revision until the second business day after the rating is published.
While Martin cannot provide investment advice or recommendations, he appreciates your feedback;
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