Hottest ETFs For The Week Ended 18-Oct-2009

Each week, I like to publish the past week’s hottest ETFs to share some new trends and niche ETFs out there and give investors some new investing/diversification ideas. Last week, emerging markets and commodities had quite a showing. I’ve made sure to include both some leveraged ETFs with their outsized gains as well as non-leveraged traditional sector ETFs. There are some ETNs in the mix as well, since not every individual commodity is covered by an ETF. ETNs often carry additional counterparty risk, so ensure you’ve investigated a particular ETN and parent company solvency before considering.

Top Leveraged ETFs

Ultra DJ-AIG Crude Oil ProShares (UCO) - Up 18% - Oil reached new 2009 highs last week on the usual mix of news items on supply, demand and international happenings. The weak dollar trend is a large part of the moves as well. Since this is a leveraged ETF, near term moves up are magnified substantially over a 1 week period. However, given the longer term loss in value in leveraged ETFs I always start this section off by highlighting what can happen to these over time - see “How to Lose 90% in an ETF Fast“.

Direxion Daily Energy Bull 3X Shares (ERX) - Up 15% - This ETF seeks to return 300% of the daily performance of the Russell 1000 Energy Index. With oil prices hitting year highs this week, the underlying energy companies really took off this week again. If the upcoming hurricane season is not as benign as anticipated or if the global economy continues to pick up steam, an onward march for oil is certainly feasible.

Ultra Russell3000 ProShares (UWC) - Up 13% - While this one showed up on the hot list, it’s a bit of an anomaly so I thought it was worth highlighting here. The Russell 3000 1x ETF IWV was only up marginally at 1.4% on the week. UWC has virtually no trading volume and there’s a huge bid/ask spread on it. On many days, there are no shares exchanged. I’d recommend avoiding this one (in addition to the risks of leveraged ETFs) unless it starts picking up some volume and matching expected returns.

PowerShares DB Agriculture Dble Long ETN (DAG) - Up 10% - Agricultural products are hot with the resurgence of the global economy and a weakening dollar. This ETN was up 10% on the week, but a safer play to remove the long term leverage degradation may be some straight commodities ETFs or if you’re looking to hedge a particular commodity, there are many niche commodity ETNs that don’t cover a full basket (see below).

Top Non-Leveraged ETFs

iPath DJ AIG Sugar TR Sub-Idx ETN (SGG) - Up 12% - Trading in a sugar ETN (exchange traded note which has some different properties than ETFs that you’d want to research further) is probably best suited to those with industry knowledge, but there is such a niche ETN available to retail investors nonetheless. Sugar moves at the whims of India’s production output, the indirect relationship with Brazil’s sugarcane and weather all over the globe. Year to date, SGG has returned 60% vs. a 20% for the S&P500. For broader commodity representation, consider the the Greenhaven Continuous Commodity index ETF GCC, which holds sugar along with several other commodities. Note however, that SGG has routinely outperformed in recent history.

United States Gasoline ETF (UGA) - Up 11% - Gasoline prices spiked with oil hitting 2009 highs this week. Since this product uses futures contracts and attempts to track the prices, it may not exactly match the changes in price as reported in the market, but it is surely the best proxy for US prices at the pump. Personally, I’ve used this ETF before to hedge energy prices for our family’s finances. I had previously sold puts on the Oct 28 strike contract (which just expired) and I’m rolling a new one which I’ll report in my next trading update.

United States Oil Fund LP (USO) - Up 10% - This ETF uses futures prices for oil to try and replicate the increase or decrease of oil. Unfortunately, USO and USL tend to be the most popular proxy instruments for oil investing for retail investors but because of the futures roll timing and mechanism, in a rising market such as this one, they don’t actually keep up with the increase in the price of oil.

iPath DJ AIG Platinum TR Sub-Idx ETN (PGM) - Up 8% -This Platinum ETN continues to run. As I highlighted in my gold hype rant, if you’re buying gold as a weak dollar ETF, you should really be thinking about silver, platinum or just buying currency ETFs to get a more levered (metals) or direct (currencies) move out of the continued weakness in the dollar, as opposed to holding the useless metal that’s really just appreciating due to the weakening dollar. And make sure you fully understand the gold dollar correlation and why you’re buying gold if you have your heart set on it. PGM is up 50% YTD vs. 19% for GLD, the predominant gold ETF.

Disclosure: The author sells puts on UGA to hedge energy prices and is holding a USO call contract with January expiry.

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