ETF Expert

Trading volume is light. Short sellers are covering their rear-ends. Europe will find its way into a second recession. In fact, the bearish crowd declares, this is nothing more than a market melt-up.

(Of course if you are long stock assets, do you really mind a market melt-up? Just wondering!)

Bulls have painted a different picture. They believe that the S&P 500’s ability to break through its 200-Day MA is an indication of pre-earnings enthusiasm; that is, corporations should continue beating earnings expectations and that corresponding Forward P/Es are making stock assets impossible to bypass.

Ironically enough, say many of the most bullish on the bandwagon, there’s a belief that extremely modest job growth is actually beneficial. If companies had to hire quickly in a rapid-fire economic recovery, interest rates would have to climb at a quicker pace and potential inflation would follow. Wouldn’t that development be a troublesome prescription for stocks?

In contrast, corporate hiring that occurs at a leisurely pace keeps fiscal and monetary stimulus form disappearing altogether. Ergo, you get developed world GDP growth, low interest rates, modest employment gains, strong corporate profitability and… the kicker… a continuation of the cyclical bull for stocks.

Those are some of the arguments… both con and pro. Yet I thought I’d evaluate stock ETFs based on 1-month momentum and low beta relative to the domestic market at large.

Is this seeking out the chocolate cake and wanting to eat it as well? Yes, perhaps. Nevertheless, it doesn’t hurt to covet the near-term winners that have also demonstrated less overall risk than the S&P 500.

On May 24, 2010, I discussed the probability that preferred stock ETFs were flashing an eventual return to some level of risk taking.  This may not have spilled over to common stock assets until mid-June. Still, there’s a reasonable amount of intrigue on the part of the purchasing public for diversified investments that pay annualized income of 7%+ on a monthly basis. And the risk relative to common stocks is roughly half.

How have two emerging markets — one in Latin America and one in SE Asia — managed to be ”less risky” than U.S. stocks? How has Thailand (THD) and Chile (ECH) been able to outhustle the largest ETF in the S&P 500 SPDR Trust (SPY)?

I’ve addressed several reasons in previous commentary. Some of it comes down to the nature of the largest holdings. In Thailand’s case, the largest segment in the exchange-traded fund is financials, where emerging market banks have been dubbed safer than developed market banks by the investment community.

Chile (ECH) is a bit more intriguing, though. Granted, utilities is the largest segment, and utilities are famously less risky than materials and tech. Yet Chilean exposure to copper is about as large as it comes… and one would expect far greater volatility from a stock fund with extraordinary exposure to the world’s “most useful” metal.

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