Free Samples • Free Newsletter Sign-Up • Subscribe! Note: Learn about my strategies for picking top-performing stocks by visiting The Coolcat Guide to Winning Stocks. The Coolcat ABCs of ETFsBy Kevin Kennedy Exchange traded funds, or ETFs as they are better known, are dramatically growing in popularity. Assets invested in ETFs have surged in the past few years to more than $500 billion, and there are now more than 700 ETFs for investors to choose from. ETFs are similar to mutual funds, but are traded like stocks. They generally represent major stock indices, industry sectors or major international country indices. In other cases they will represent a basket of stocks with similar fundamental characteristics such as high dividend yields. Unlike mutual funds, whose reporting of holdings can lag by months, the holdings and weightings of ETFs are generally updated daily, offering greater transparency. These funds allow for greater diversification of your portfolio by allowing investors to invest quickly and easily in major market indexes, hot sectors, foreign countries and even commodities. You can track the S&P 500 Index or the Dow, invest in small cap indexes or bet on the price of gold or oil going up or down. Barclays Global Investors dominates the category with its more than 150 iShares ETFs. Most ETFs are traded on the American Stock Exchange. The Coolcat Report Approach to ETFs The newsletter is recognized as the No. 1 ETF portfolio for the past three years by Hulbert Financial Digest, the investment newsletter watchdog. The newsletter's Coolcat ETF Portfolio posted a 20.9% gain in 2005, added a strong 22.7% return in 2006 and rose 10.3% in 2007. The dramatic outperformance of international ETFs was responsible for most of the Coolcat ETF Portfolio's gains. Take a look at the sizzling profits my readers have enjoyed from my top performing ETFs: Published regularly since June 2004, The Coolcat ETF & Fidelity Select Report includes two model portfolios with buy and sell signals, as well as my momentum-based rankings of the top-performing ETFs and Fidelity Select mutual funds. The newsletter, which has been featured in Investor's Business Daily, Forbes.com and MarketWatch.com, is sent monthly by email at the beginning of each month. My ETF StrategyIt's useful to review my approach to stocks as outlined in The Coolcat Guide to Winning Stocks on my Strategies page. As with stocks, I use market timing to be more aggressive in strong markets. I then want to choose the top-performing ETFs and use solid money management rules to keep my losses small and let my winners run. My goal at the end of each month is to narrow the universe of ETFs to a manageable number that includes the best prospects. To do that, I look for the best performing ETFs that also trade enough volume to ensure liquidity. I also want to identify the ETFs with the greatest price volatility to increase the potential for big gains. My first step is to require all ETFs to have an average daily trading volume during the past three months of at least 100,000. This indicates a solid level of acceptance among ETF investors and traders and ensures sufficient liquidity to avoid irregular price movements. Your position in an ETF should not represent more than 5% of the average daily volume to avoid influencing the price action of that ETF with your buys and sells. Some of the ETFs that have been created have not gained acceptance because they focus on a narrow niche market. In other cases, the ETF gives investors essentially the same type of exposure as another, more popular ETF. We can generally eliminate about 75% of the ETFs with our 100,000-volume requirement and get the number down to about 100-150 with that step alone. My second step is to require at least a 1.3-to-1 ratio between their 52-week highs and lows to ensure some volatility. This again helps trim the field down to the best ETFs for consideration. It also keeps us from considering ETFs that are basically going nowhere fast. This generally includes larger index proxies like the QQQQs (Nasdaq 100 Trust) and the SPY (S&P 500) that simply don't move as much as more aggressive international and sector ETFs. The second step will generally cut the list down to about 40-60 ETFs or less. I then rank those ETFs by six-month percentage gain and eliminate those whose price is lower than it was six months ago. I also require ETFs to have traded for at least six months, be priced above $5 and represent at least 10 stocks. This approach tends to narrow the list to a manageable number of ETFs to analyze further before making decisions on which ones to add to my portfolio each month. Merrill Lynch HOLDRs are investment vehicles that are very similar to ETFs. One major difference is that they must be traded in round lots of 100 shares. Because of this, I require the price of HOLDRs to enable purchase of 100-share (round) lots within 10% of $10,000. For example, if the price of a HOLDR is $33, this would meet my requirement because you could buy 300 shares for $9,900 plus commissions. The Coolcat ETF RankingsDepending on the strength of the market, I will generally be left with a list of 15-50 ETFs ranked by six-month gain. I list the following information in the Coolcat ETF Rankings: I highlight new listings and current portfolio positions and discuss the significant changes in the list from the previous month. I also provide some insight into my choices for the top-ranked Coolcat ETF Portfolio. Many of the top-ranked ETFs will already be in my portfolio, so I will skip those. I'll do the same thing with other ETFs which simply mirror the same investment objective as ETFs that are already in my portfolio. Eliminating The Copycats There are a lot of "me-too" ETFs out there, so it's important to at least take a quick look at their investment objective and holdings. Many ETFs are almost identical, or close enough that you are not gaining any significant diversification by adding the second one. A good example is streetTRACKS Gold Shares (NYSE: GLD), which aims to reflect the price of gold bullion. iShares COMEX Gold Trust (AMEX: IAU) does exactly the same thing. They rarely vary more than a few pennies in price and their performance gains or losses over time will be almost identical. There is one significant difference, however: GLD trades more than 14 million shares a day, while IAU's average volume is about 500,000. When I am interested in gold, I will go with GLD. Once I have eliminated the ETFs already in my portfolio and the copycats, I will generally buy from the top of the ranked list. Portfolio Size Money Management I'll sell if the ETF closes below its close of six months ago or falls out of the top 15 in my rankings. I also might sell: The Coolcat Report Approach to Fidelity Select FundsFidelity Select Sector funds include 41 no-load sector funds and a money market fund. Over time these products have developed a remarkable track record. Generally you will find at least five of the 15 top-performing mutual funds for the past 15 years are Fidelity Select funds. This means you get a diverse batch of different industry proxies with excellent management. My approach with the Fidelity Selects is similar to my ETF approaches. I look to buy funds with the best six-month performance whose price-low ratio also meets minimum standards. Again, this gives me funds with good recent momentum and enough volatility to become bigger potential winners. I will sell if the fund's performance turns negative for six months or falls out of the top 15 and look for a suitable replacement from the top of my most recent rankings. In weaker market conditions, I will raise cash and be less aggressive. The Coolcat Fidelity Select Portfolio has gained 41.2% since inception, including a 5.9% gain in 2007. I Welcome Your Questions and Comments I wish you all the best of luck in your investing. Kevin Kennedy Coolcat@CoolcatReport.com Now publisher of 5 great investment newsletters! * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * Information for CoolcatReport.com investment newsletters is obtained from a variety of sources. I am not a stockbroker or financial adviser. The information provided is not to be considered as a recommendation to buy certain stocks and is provided solely as an information resource to help investors make their own investments. Past performance is no guarantee of future success. The contents of CoolcatReport.com investment newsletters are copyrighted and reproduction or retransmission without permission is expressly prohibited. © 1997, 1997-2008 CoolcatReport.com 
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Riding The ETF Wave Find out why Kevin Kennedy’s Coolcat ETF Portfolio was recognized as the No. 1 ETF portfolio for 2005-2007 by Hulbert Financial Digest with a sizzling 63.6% return. The Right Stuff Discover the best strategies for picking winning stocks and ETFs with The Coolcat Guide to Winning Stocks and The Coolcat ABCs of ETFs. Spotlight Stocks New highs and strong volume gainers.
Exclusive Interviews With Kevin Kennedy CoolcatReport.com Publisher Kevin Kennedy appears regularly on "Straight Talk with Bram Solloway", exclusively on AlphaTrade Finance. Best Investing Sites Featured Articles Discover the Secrets for Identifying Top Stock Picks CoolcatReport.com Publisher Kevin Kennedy reveals how to find the strongest stocks in MarketWatch's Guru’s Corner.  |
