Precious metals ETFs rallied in the third quarter as the
dollar weakened further and the Federal Reserve continued its
quantitative easing efforts in hopes of boosting asset prices and
Europe, Japan, China, Brazil and India are all engaging in
various forms of economic stimulus to support growth.
ETFs that track market volatility were top performers.Velocity
Shares Inverse VIX Short-Term (
) jumped 61.63%.
Global X Silver Miners ETF (
) surged 39.57%.IShares Silver Trust (
), tracking silver bars, climbed 30.63% in the three months ended
September.SPDR Gold Shares (
) rose 10.76% over the same period.
"Many people view (precious metals) as a substitute for paper
currency in a time when paper currencies are being debased," said
Bill Strazzullo, chief market strategist at Bell Curve Trading in
Freehold, N.J. "Silver also has a number of industrial uses,
which allows it to participate in risk-on rallies and any set of
circumstances that portend an improving global economy."
PowerShares DB U.S. Dollar Index Bullish (
), measuring the dollar against a batch of foreign currencies,
fell 3.78% in the quarter.
"In light of the debt situation in the U.S., the looming
challenges of the fiscal cliff and massive entitlement
obligations, the trend for the dollar is clearly lower in the
medium and long-term," said Jason Schenker, chief investment
officer of Prestige Asset Management in Austin, Texas. He
recommends clients invest in gold bullion ETFs and sees the
yellow metal spiking above $2,000 an ounce within six months.
ETFs tracking the world's most indebted and riskiest countries
rallied the most despite the European recession and ongoing fears
over the debt crisis.
Global X FTSE Greece 20 (GREK), up 32.25%, outperformed all
countries.IShares MSCI Spain Index (EWP) rallied 19.77%
andiShares MSCI Italy Index (EWI) rose 15.34%.
"Central banks are forcing investors to take risk by keeping
interest rates low, so they are going for the most beaten down
areas," said Matthew Tuttle of Tuttle Wealth Management in
Market Vectors Egypt Index (EGPT) rallied 26.85% in the third
quarter and a whopping 64.80% year to date. It rebounded sharply
after crashing 52% last year.
"This is what many would call a 'dead cat bounce' and part of
the overall 'risk on' dynamic that most of 2012 has taken on,"
said Scott Freeze, president of Street One Financial, a
broker-dealer in King of Prussia, Pa. "Egyptian publicly traded
companies were pummeled by the lack of confidence and broader
'risk off' rotation last year."
Gasoline ETF Explosion
United States Gasoline (UGA), offering exposure to gasoline
futures contracts traded on the New York Mercantile Exchange,
rallied 32.49% in the third quarter. That's while spot gasoline
prices climbed 24% and spot crude oil surged 15.8% in Q3. UGA
benefited from a phenomenon in futures trading called
backwardation. This occurs when the front-month contracts cost
more than later-month contracts. So when the fund sells the
front-month contracts to buy the later-month contracts to
maintain its exposure to the underlying commodity, it books a
Front-month contracts shot up because Hurricane Isaac
temporarily closed down more than one million barrels a day of
Gulf Coast refinery output, said Tom Kloza, chief oil analyst at
Oil Price Information Service. And there were refinery fires in
California, Venezuela and Canada. All of which happened in
U.S. gasoline stockpiles were down 9% year over year for the
week ending Sept. 21, according to the U.S. Energy Information
Administration. Average pump prices increased 9% year over year
for the week ending Sept. 24. But MasterCard data show demand is
down 4.4% from last year, said Aaron Visse, a portfolio manager
at San Francisco-based asset management firm Forward.
SPDR S&P Homebuilders (XHB) rallied 21% and iSharesDow
Jones US Home Construction (ITB) 19.89% in Q3 on increasing signs
that the housing market has finally bottomed.
"Housing is a bright spot in the U.S. economy and may very
well lead the next leg of the economic recovery," said Kevin
Mahn, president and chief investment officer of Hennion &
Walsh Asset Management in Parsippany, N.J. "The growing momentum
in real estate makes real estate investment trusts (REITs) and
homebuilders worthy of consideration."
ITB and XHB's top holdings, the country's largest
homebuilders,D.R. Horton (DHI),Lennar (LEN),Pulte Group
(PHM),Toll Bros. (TOL) andNVR (NVR), all posted double-digit
sales growth this year and double- or triple-digit earnings
Some analysts doubt the winning streak will continue.
"New-home sales will be relatively flat in the second half of
2012," said Todd Rosenbluth, ETF analyst at S&P Capital IQ in
New York. "Foreclosure starts are rising for the first time since
2009, and we see higher home prices inviting more sellers to the
market, pressuring sales of new homes."
Chinese ETF Cheap
IShares FTSE China 25 Index Fund (FXI), tracking 25 blue chip
companies, returned 6.49% in Q3, underperforming iSharesMSCI
Emerging Market's (EEM) 10.29% gain. The country's economic
growth has cooled to its lowest rate in a decade, while excess
supplies and unsold products flood stores and warehouses.
Simon Maierhofer, founder of iSPYETF.com in San Diego,
recommends buying FXI as a contrarian play in the fourth
"Contrarian investors know that forecasts of 'hard landings'
often turn into some of the best buying opportunities,"
Maierhofer said. "Contrarian investing means going against the
crowd and requires nerves of steel and often patience."
FXI trades at a low price-to-earnings ratio of 8 vs. 11.5 for
the MSCI EAFE index and 14 for the S&P 500. It trades a lower
price-to-sales, price-to-cash flow and price-to-book ratio, while
offering a slightly higher dividend than the S&P 500.
Broad Market Overview
SPDR S&P 500 (SPY) gained 8.423% in Q3 and a handsome
14.72% year to date.PowerShares QQQ (QQQ), tracking the 100
largest names on the Nasdaq, climbed 10.24% and 22.82% over the
Kenneth Heck, chief financial officer at Heck Capital
Advisors, believes the market will pullback before on a slowdown
in Q3 earnings before rallying through the end of the year.