With stocks soaring Thursday on reports that regulators will form a 1990s' style resolution trust to rescue banks, traders are hoping markets can mount a sustainable rally in coming days.

But some of the most actively managed exchange-traded funds aimed at long-term investors are holding steady. In fact, their recent shifts into heavily sold sectors such as Financials and Energy stand as a stark contrast to what's going on with short-term stock traders.

What these quasi-active, quantitative-based ETF managers aren't doing is more interesting in the current environment as what they are, in many respects.

Of course, they don't agree in all areas. But consider that while investors have been rushing to the exits, the Claymore/Zacks Sector Rotation ETF (AMEX: XRO) has kept a fairly healthy exposure to Financials. After its underlying index's latest rebalancing at the end of June, the fund had some 14.2% in the sector. That compares to 14.3% in the SPDR S&P 500 ETF (AMEX: SPY), which follows a much more static index.

From a historical perspective, valuations of the Financial sector appear attractive for long-term-oriented investors, says Christopher Huemmer, vice president of index strategies at Zacks Investment Research, which created the XRO's underlying benchmark.

When you look at some of the other factors, such as earnings growth and broader economic issues, it lessens the attractiveness of the sector, he admits.

Leading Component 

"But when you look at the various valuation multiples of Financials over time, the sector as a whole still remains attractive enough to remain as a leading component in the index for the present time," Huemmer said.

That's another interesting point considering the ETF can hold as few as three sectors. But it also can go up to 13 compared to the S&P 500's constant tie to 10 major stock sectors. Right now, XRO has nine, which is interesting. In bullish markets, it typically holds fewer sectors. When markets go down, the model tends to diversify and hold more rather than fewer sectors, says Huemmer.

The ETF's benchmark divides up the blue chip market into 16 different sectors, six more than the S&P 500, to screen for stocks. That more granular view of markets can provide a more in-depth peek into what's going on these days in blue chip markets. Using more than 10 different factors, the Zacks process also takes a top-down approach, using more than 10 different factors to size up stocks. It compares sectors based on macro trends, relative sector valuations and earnings growth trends.

The model is rebalanced quarterly. "This last rebalance was done at the end of June, so there was already fallout from financials included in the model," Huemmer said. "At the end of this month, it'll be interesting to see how the portfolio reacts when the index is rebalanced again with the sell-off in Lehman Brothers and the problems with AIG and other financials."

The caveat here is that the fund is badly underperforming the S&P 500 so far this year. But in the past 12 months, XRO is still whipping the S&P 500 by more than 2 percentage points. With XRO nearing its two-year-old mark, Huemmer also points out that the benchmark is designed as an alternative to give index investors a way to implement a rules-based sector strategy. That's quite different from how long-term passive investors normally attack markets using broad asset classes to set allocations.

Another more active ETF taking a contrarian approach is the SPA MarketGrader 40 (AMEX: SFV). It's based on a set of indexes that have been around for a few years and built excellent three-year records against the broader market. In fact, the MarketGrader methodology has been picked by Barron's magazine to base its new Barron's 400 index.

Previous Page

1  |  2

Next Page