Trio Of Alternative ETFs Remains Above The Fray

February 12, 2009

Three funds are outperforming the broader stock market. And these ETFs appear to have strong fundamentals as longer-term portfolio plays. 

Exchange-traded funds focusing on Agriculture, Emerging Markets and Biotech are outperforming the S&P 500 by a mile early in 2009.

And they look like good bets going forward as longer-term holdings. Despite uncertainty in most other areas of the market, these three spots look fairly bullish. And the reason is these industries are making money and remain quite profitable in an otherwise-dismal earnings environment.

The Latest On MOO

Take the Market Vectors Agribusiness ETF (NYSE: MOO). Early in 2008, hedge funds and other speculators piled into fertilizer stocks and several other parts of the Agricultural sector. For example, the ETF's top holding is Potash Corp. Its share price from the beginning of last year to midyear nearly doubled. Then, as momentum players tried to get out and play with something else, the stock tumbled in value.

So it was a wild ride last year for Potash and MOO. The ETF wound up losing more than 50% by the end of 2008. And that was after MOO was up around 50% at one point early in the year.

Early in 2009, the ETF had gained 2.4% through midday on Thursday. What has turned around MOO's performance is strong earnings reports as well as guidance for future earnings from many of its top holdings. For example, fertilizer manufacturer Mosaic is up more than 20% on the year. At the same time, Potash has gained more than 14% and Monsanto is up 12%-plus.

What does that mean going forward? Look at other key holdings of MOO. One is Bunge, which is down more than 3% for the year. But the diversified fertilizer and oil seed producer saw its stock jump 15% on Feb. 5 based on an improved second-half 2009 outlook by the company. Its chief financial officer said he felt the industry had seen its trough and that better times lie ahead.

Let's not also forget that people have to eat in good times as well as bad. So the Agricultural sector is likely to keep showing some short-term volatility. But fundamentally, MOO looks like a long-term winner. From a technical analysis standpoint, it's consolidating after a big run-up started at the end of November 2008.

XBI Making A Move?

Biotech is also faring better in an awfully depressing market. The SPDR S&P Biotech ETF (NYSE: XBI) was up more than 2% for the year at midday Thursday. Just as importantly, it has continued to trend up when the S&P 500 has dropped. And the Tech sector is doing much the same. The PowerShares QQQ (NASDAQ: QQQQ) is now up slightly in 2009. In fact, we've added the ETF to our client portfolios after the market's big sell-off on Feb. 10.

As baby boomers get older, demand for drugs that can stem the influences of aging on the body will keep rising. Along those lines, a tremendous amount of innovation is likely to come out of DNA research. That's going to keep putting the Biotech field in the forefront of innovation, both in terms of health care and technology. As a result, investors with a longer-term time horizon might be more interested in sticking with an ETF like XBI than broader Tech plays.

EEM Holding Its Own

And as we explore volatile segments, emerging markets has certainly filled that bill. Share prices of the iShares MSCI Emerging Markets Index ETF (NYSE: EEM) were down more than 6% while the S&P 500 was approaching a 10% drop for the year through midday Wednesday.

But EEM has shown similar volatility relative to the S&P 500 this year. But it hasn't dropped nearly as hard and it's still technically in an uptrend—unlike the broader market. EEM started making a move up about three weeks ago as China's economy has shown improvement. That's the fund's top geographic holding. And its second-biggest market is Brazil, which is also rebounding of late. Together, those two countries make up about 29% of the ETF and have led to a dramatic turnaround in its fortunes.

Looking forward, the theory is that these countries' economies are quite a bit younger than the U.S., with room for growth. And their populations are better savers. But not only are consumers in a better position to spend in the future, so are their governments. Some of the most important developing markets are net lenders to the rest of the world. In fact, Brazil is one of the notable few considered to be self-sufficient from an economic standpoint.

Right now in our model portfolios, we're only about 16% net long in stocks. In fact, we're so cautious going forward that we're hedging these equity positions with a 5% stake in the ProShares UltraShort S&P 500 ETF (NYSE: SDS). It's up 15% so far this year. Almost half of our assets are in cash.

But MOO, XBI and EEM are ETFs we feel strongly about in such turbulent times. And although we've got limits on how much in losses we'll accept, this trio appears to be better-positioned these days to outperform than most other equity ETFs.

Anthony Welch is a portfolio manager and co-founder of Sarasota Capital Strategies in Osprey, Fla. The ETF strategist welcomes comments and suggestions for future columns at [email protected].


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