Hottest ETFs For The Week Ended 25-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 continued to show strength while some of the other usual suspects took a breather and the S&P500 ended with week with a small loss of 1%. I’ve made sure to include both some leveraged ETFs with their outsized gains (but take note of leveraged ETF risk of value destruction over time due to daily rebalancing) 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/ETNs

BDD - PowerShares DB Base Metals Dble Long ETN - Up 13% - With the US Dollar continuing to weaken against foreign currencies and signs of a global economic recovery, this double long ETN for base metals turned in a strong weak in a roughly flat equities market. BDD is up 46% vs. a 10% return for the S&P500 over the prior 3 month period.

UCO - Ultra DJ-AIG Crude Oil ProShares - Up 9% - Oil moved up again on the week, continuing its ascent. UCO is levered the move of oil and as long as the trend is as strong in the upward direction, the trend is overcoming the long term value degredation that occurs in leveraged ETFs. For instance, in the prior 3 month period, USO is up 12% while UCO is up 21%, pretty close to a 2X increase over the straight oil futures ETF USO (which granted, has its own tracking error due to monthly rolling of futures contracts).

UCD - Ultra DJ-AIG Commodity ProShares - Up 7% - This ETF’s intent is to return twice the daily performance of the Dow Jones UBS Commodity Index. Again, same story with global market recovery and currency effects. UCD is up 22% over the prior month, 21% over the prior 3 months, but is up only 15% over the prior 1 year period, less than the 26% return of the S&P500.

A major theme in the markets and in the mainstream press lately has been speculation over the demise of the US dollar as other countries seek to replace their reserve currency with gold and a basket of other currencies. You’ll probably continue to see strong volatility in commodities ETFs in the near term while this news cycle continues.

Top Non-Leveraged ETFs/ETNs

GRN - iPath Global Carbon ETN - Up 8% - Here’s an article from Barron’s in March making the case for Carbon trades which hasn’t totally panned out from the early recommendation, but of late with the administration’s plans, perhaps there’s room to run on this one. It’s a relatively complex play, so definitely research this one further if considering this alternative play. GRN has performed relatively poorly this year and with the low volume on this one, I’m not sure I’d recommend it even if I did feel strongly who the winners are going to be here.

BHH - B2B Internet HOLDRs - Up 7% - This internet ETF is actually up exactly 100.0% YTD vs. a gain of 20% for the S&P500. In prior downturns, we saw tech get hammered, but surprisingly, this time around, tech had no direct role in the market euphoria and these companies seemed to have learned a thing or two about living without excessive costs and holding cash. Tech may very well continue to outperform if we’re looking at a slow recovery in financials and housing. What we’re seeing here is companies that do have cash to invest are investing in productivity gains via technology rather than capital-intensive purchases and rehiring of employees as the job numbers are showing. As such, BHH may make for a decent pairs trade against real estate or retail sectors which you may feel will not perform strongly during the recovery.

UGA - United States Gasoline - Up 5% - Gasoline prices spiked further with oil hitting 2009 highs again 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.

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