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New ETF trading ideas

Large-cap value and Japanese stock ETFs have been popular. Here are other opportunities.

  • Active Trader News
  • – 10/25/2013
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Inflows into stock ETFs have dwarfed bond ETF flows this year, and why not? It’s been a relatively volatile year for bonds, while the S&P 500® Index is up more than 22% in 2013 as of mid-October. Here are some new stock ETF ideas for the final stretch of what has thus far been an outstanding year for the market.

Cash chasing stock ETFs

ETFs have broadly seen large investing inflows this year—although not as high as last year’s record-setting level—and a few areas have outpaced the rest. The big ETF winners year-to-date, in terms of inflows by Morningstar category, are Japanese stocks ($13 billion) and large-cap value ($12 billion).1 Indeed, some experts believe that developed markets appear well positioned relative to the rest of the world, and so it is not surprising that these ETFs have attracted investors.

Strong flows and value ETFs

What new ETF investing opportunities might there be? Fidelity offers a number of preset expert strategies, one of which is the Highest Prior Week Net Flows provided by Marco Polo XTF, Inc.2 This screen identifies the ETFs with the highest amount of net flows during the previous week.

As of October 23, 2013, ETFs offering deep value based on this screen were:
SPDR S&P 500 ETF (SPY)
Powershares QQQ (QQQ)
iShares iBoxx $ High Yield Corporate Bond ETF (HYG)
SPDR S&P Midcap 400 ETF (MDY)
FTSE Developed Markets ETF (VEA)
SPDR Barclays High Yield Bond ETF (JNK)
Select Sector SPDR Financials (XLF)
iShares MSCI Japan ETF (EWJ)
Vanguard Total Stock Market ETF (VTI)
iShares MSCI ACWI ETF (ACWI)

Another preset screen is Deep Value ETFs provided by Morningstar. This screen attempts to uncover ETFs holding securities that are trading in deep value territory based on commonly accepted valuation criteria, such as price-to-book and price-to-sales ratios.

As of October 23, 2013, ETFs offering deep value based on this screen were:
Global X Central Asia & Mongolia Index ETF (AZIA)
First Trust Hong Kong Alphadex Fund (FHK)
Guggenheim China Real Estate ETF (TAO)
WisdomTree Global Ex-US Real Estate Fund (DRW)
iShares Mortgage Real Estate Capped ETF (REM)
Market Vectors Mortgage REIT Income ETF (MORT)

Sector leaders

Fidelity has ten new sector ETFs available to purchase online commission-free.

  • Fidelity MSCI Energy Index ETF (FENY)
  • Fidelity MSCI Materials Index ETF (FMAT)
  • Fidelity MSCI Industrials Index ETF (FIDU)
  • Fidelity MSCI Consumer Discretionary ETF (FDIS)
  • Fidelity MSCI Consumer Staples Index ETF (FSTA)
  • Fidelity MSCI Health Care Index ETF (FHLC)
  • Fidelity MSCI Financials Index ETF (FNCL)
  • Fidelity MSCI Information Technology Index ETF (FTEC)
  • Fidelity MSCI Telecommunication Services Index ETF (FCOM)
  • Fidelity MSCI Utilities Index ETF (FUTY)

Free commission offer applies to online purchases of Fidelity ETFs in a Fidelity brokerage account with a minimum opening balance of $2,500. The sale of ETFs are subject to an activity assessment fee (of between $0.01 to $0.03 per $1000 of principal) by Fidelity. After 02/01/2014, Fidelity ETFs are subject to a short-term trading fee by Fidelity, if held less than 30 days.

ETFs may be particularly useful when investing with a sector-based strategy. Despite some turbulence from potential Fed tapering and the government shutdown, stocks have surged in 2013, and certain sectors of the market have outperformed.

The consumer discretionary sector has led the way, gaining more than 32% as of mid-October 2013, easily topping the broad market’s 22% rally. Along with financials, this sector finished atop the leaderboard in 2012. Using a narrower lens, there may currently be a number of industry investing ideas to consider, including cloud computing, fast fashion, and biotech.

An ETF world

Of course, there have been bumps in the road for ETFs this year. Both stock ETFs and bond ETFs saw outflows during June when there was a noticeable increase in market volatility: Stock ETFs incurred a net outflow of over $3 billion, while more than $7 billion left bond ETFs that month.3 The roughly $11 billion in net stock and bond outflows during June marked a record—by a wide amount. In fact, the previous time ETFs had suffered any net outflow was December 2011, when just $20 million in funds were withdrawn.

One ETF segment that has been particularly weak year-to-date, in terms of flows, is the commodities space. The energy commodities Morningstar category has seen net outflows of over $1 billion, and precious metals commodities ETFs have incurred outflows of more than $22 billion year-to-date.

ETF 411

For the basics on ETFs and how you might use them in your portfolio, visit the Exchange-Traded Funds section on Fidelity.com for more information.

Despite the pockets of weakness, ETF inflows approach $90 billion as of mid-October 2013. That’s a very strong period of performance, faring roughly on par with previous years, and it follows the record 2012 inflows of $188 billion.

Learn more

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Before investing in any mutual fund or exchange-traded fund, you should consider its investment objective, risks, charges, and expenses. Contact Fidelity for a prospectus, offering circular, or, if available, a summary prospectus containing this information. Read it carefully.
Exchange-traded products (ETPs) are subject to market volatility and the risks of their underlying securities, which may include the risks associated with investing in smaller companies, foreign securities, commodities, and fixed income investments. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risk, all of which are magnified in emerging markets. ETPs that target a small universe of securities, such as a specific region or market sector, are generally subject to greater market volatility as well as the specific risks associated with that sector, region, or other focus. ETPs that use derivatives, leverage, or complex investment strategies are subject to additional risks. The return of an index ETP is usually different from that of the index it tracks because of fees, expenses, and tracking error. An ETP may trade at a premium or discount to its net asset value (NAV), or indicative value in the case of ETNs. Each ETP has a unique risk profile, which is detailed in its prospectus, offering circular, or similar material, and which should be considered carefully when making investment decisions.
1. Strategic Insight Simfund FI, as of October 13, 2013.
2. The screens and their results are for educational purposes only and should not be considered investment advice or guidance, an offer of or a solicitation of an offer to buy or sell securities, or a recommendation or endorsement of any security by Fidelity.
3. Same as note 1.
Investment comparisons are for illustrative purposes only and are not meant to be all inclusive. There may be significant differences in investments that are not discussed here.
Diversification does not ensure a profit or guarantee against a loss.
Stock markets are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments.
Sector funds can be more volatile because of their narrow concentration in a specific industry.
Past performance is no guarantee of future results.
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