12/12/2007: ETF Expert’s Morning Review
12 December 2007 at 9:12 am by Gary Gordon
1. You’ve got to hand it to Morgan Stanley (MS). The investment firm’s stock has been whacked by 45% in the last 6 months due to nearly $4 billion in trading losses… that we know about! But that’s not stopping their analysts from making ETF recommendations.
Specifically, John Spence at CBS MarketWatch reported that Morgan Stanley analysts would recommend overweighting the Energy Select SPDR (XLE), the Healthcare Select SPDR (XLV) and the Information Technology Fund (IYK).
In truth, I only find one thing unique about the overweight/underweight selections; that is, the bullishness remains with the same momentum leaders we’ve seen in 2007 while there appears to be less allocated to the traditional defensive areas like Utilities (XLU) and Telecom (IYZ).
Perhaps the most intriguing way to get gains out of a tough-growth environment might be to look abroad; more specifically, Global Utilities (JXI) and Global Telecom (IXP) have been outstanding in 2007 each with roughly 22.5% gains YTD. (See my recent commentary on Global Utilities or Global Telecom here.)
2. Jeffrey Ptak of Morningstar seems convinced that you can beat the market. However, it would appear that you’ll need to deftly catch the proverbial falling knife to do so.
For example, Morningstar sees "bargains galore" among financial and homebuilder-focused ETFs. Recognizing that the banks and the homebuilders have been crushed, the KBW Bank ETF (KBE) and the iShares Dow Jones US Financial Services Fund (IYG) ranked as some of their top picks. Their research suggests that financials will compound at 20%+ per year for the next 3 years.
Before getting jazzed by this prediction/forecast, let’s look at the fact that this "call" was first initiated on 11/12/07. The KBW Bank ETF (KBE) and the iShares Dow Jones US Financial Services Fund (IYG) both returned 0% from 11/12/07-12/11/07, while the market vis-a-vis the S&P 500 gave us 3%.
Granted, Morningstar specifically asked for 3 years to beat the market, not one month. Still, even with the Fed and foreigners bolstering the U.S. banking system, catching that knife seems a tad risque.
(3 years out… though. There’s little doubt that financials have been hit the hardest and that 3 years may be plenty of time to surge back.)
