ETF Prospects On A Market Rebound

Exchange traded funds (ETFs) are set to be one of the best-kept market bets when the stock market decides to rebound.

So far, the ETFs that are tied to worldwide market indexes have gone through a rough patch. According to Lipper data, 36 funds out of a total of 745 have managed positive one-year return, reports Andrea D. Murphy and John J. Ray for Forbes. All but four of those were focused on short-selling.

ETF investors still have hope for the day when this turmoil settles. When markets rebound-which they eventually will-these low-cost, tax-efficient and easy-to-trade investments will rise in step along with their underlying market indexes.

Using the price-to-book (pb) metric as a guide, Forbes looked for beaten-down ETFs that appear to be good value propositions (besides real estate and financials, which still need time). Price-to-book compares the market’s valuation of a company to the value of the company as indicated on its financial statements.

Here is a sample:

• WisdomTree Japan Small Cap Dividend Fund (DFJ): down 24% year-to-date; 1.2 price-to-book ratio
• PowerShares High Yield Equity Dividend Achievers Portfolio (PEY): down 40.9% year-to-date; 1.3 price-to-book
• iShares MSCI Japan Small Cap Index Fund (SCJ): down 28.4% year-to-date; 1.4 price-to-book

Our own strategy for getting back in will be using the 50-day moving average as our guide in the short-term.

Most funds are far below the 200-day moving average, meaning it would be a long wait before a signal to buy is reached. We haven’t been so far below the long-term trend lines in decades. As a result, we have a short-term plan for getting back into the markets if the rebound is real:

• When a fund crosses above its 50-day moving average, put 25% of the value of your portfolio.
• When the fund goes up 5%, put another 25% in.

By the time this happens, the 200-day moving average should be well within sight, and things should begin operating in line with our normal buy parameters once again.

Posted in Categories: Contributor, ETFs, External Research, Japan, Stocks.

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