Using the new wave of exchange-traded funds as a starting point for your research, I believe it's possible to pick stocks that will outperform the market.

The first part of this wave was to simply create low-fee funds that bought every stock in an index, allowing investors to mimic the returns of that index. The Spyder Trust ( SPY) and the Nasdaq 100 Trust ( QQQQ) are great examples.

The second part of this wave took things one step further and developed ETFs that mimicked the behavior of sectors. Semiconductor HOLDRs ( SMH) is an example in the semiconductor sector.

But it's the final part of this ETF wave that excites me. Taking research that demonstrates how certain fundamental considerations could lead to outperformance and then selecting stocks that meet those criteria is a very interesting technique. Although I would not invest in these ETFs, I would certainly research the holdings of each one and invest in a blend.

We set up the most creative ETFs in Stockpickr so that you can easily peruse their top holdings and see at a glance which hedge funds, mutual funds and other investors own each position. It's interesting to see which recommendations are generated by creating a portfolio that's a blend of the stocks in the different ETFs.

Here are several ETFs I believe are worth watching:

  • Ocean Tomo Patent Index. This ETF tracks companies that own valuable U.S. patents. The creators use proprietary software that tracks the patents issued by the U.S. Patent and Trademark Office and assigns value to each one.

    According to Ocean Tomo, the index has outperformed the S&P 500 by 310 annualized basis points over the 10-year span ending September 2006. The basic idea is that Wall Street analysts know how to value hard assets like cash and real estate, but they have no clue how to value a patent. So they basically value it at zero. But there is value there, so an arbitrage exists that this ETF takes advantage of.

    Go to Ocean Tomo's Stockpickr page to see its top holdings, some of which include medical instruments company Boston Scientific (BSX) (also owned by superinvestor Paul Tudor Jones, among others) and Micron Technology (MU).
  • PowerShares Buyback Achievers Portfolio (PKW). This ETF consists of companies that have repurchased at least 5% or more of their outstanding shares for the trailing 12 months. The idea here is that companies must not only announce buybacks, but be actively buying back shares. I plan to discuss this further in a future article, but some of the companies in the PowerShares ETF include Cisco (CSCO), IBM (IBM) and Dell (DELL). Check out the PowerShares ETF Stockpickr page to see the full list.
  • Sabrient Defender Index. Rebalanced quarterly, this ETF is made up of companies that had positive returns during the prior quarter and performed well on down days. The idea here is that if the market were to fall, these companies have had good returns on down days in the prior quarter. And if the market goes up, then no worries -- these companies were up in the prior quarter. Check out the Sabrient Defender Index Stockpickr page here.

    It's interesting to see the hedge funds that overlap this index. For instance, SAC Capital is in Phelps Dodge (PD), which is also part of this index. HJ Heinz (HNZ) is in this index (I guess people still eat their fries with ketchup even when the market slides) and is heavily owned by various conservative funds, including the First Trust Value Line Dividend Fund.
  • Sabrient Insider Sentiment Index. This ETF identifies 100 stocks -- from a broad universe of U.S.-traded stocks and ADRs -- that reflect favorable corporate insider-buying trends (determined via the public filings of such corporate insiders) and recent earnings estimate increases by Wall Street analysts. Check out the Sabrient Insider Sentiment Index Stockpickr page here.
  • Clear Spinoff Index. This is an index designed to actively track stocks that are spinoffs from other companies, based on the idea that these companies can now better focus on their own specific strategies and unlock value. I wrote an article about this index last week. Check out the Clear Spinoff Index Stockpickr page here.

So I believe the best way to play these ETFs is to pick a few stocks from among all of them, and see which other hedge funds and mutual funds that match your style also own those stocks.

Stockpickr tip of the day: You can see which funds (and which peer investors) are in each stock by doing a search on a symbol on Stockpickr's home page. For instance, to see all the investors Micron Technology has, click here to go to its Stockpickr page.

At the time of publication, Altucher and/or his fund had no positions in any stocks mentioned, although positions may change at any time.

James Altucher is a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of Trade Like a Hedge Fund and Trade Like Warren Buffett. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback; click here to send him an email.

Interested in more writings from James Altucher? Check out his newsletter, TheStreet.com Internet Review. For more information, click here.

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