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 $800 billion, and there are now more than 1,000 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 200 iShares ETFs. Most ETFs are traded on the New York Stock Exchange. The Coolcat Report Approach to ETFs The newsletter's ETF Portfolio is recognized as the No. 1 ETF portfolio for the past five years by Hulbert Financial Digest, the investment newsletter watchdog. The ETF Portfolio posted a 20.9% gain in 2005, added a strong 22.7% return in 2006 and rose 10.3% in 2007. It retreated 11.4% in 2008, but bounced back with a 22.6% jump in 2009 to give it a five-year gain of 77.7%. 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 Report includes two model portfolios with buy and sell signals, as well as my momentum-based rankings of the top-performing ETFs. The newsletter, which has been featured in Investor's Business Daily, Forbes.com and MarketWatch.com, is updated 2-4 times monthly by email. 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 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 200,000. 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 more than 80% of the ETFs with our 200,000-volume requirement and get the number down to about 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 100 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. I have also also eliminated leveraged ETFs from consideration. I also don't cover Merrill Lynch HOLDRs, which are investment vehicles that are very similar to ETFs. 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. The Coolcat ETF RankingsDepending on the strength of the market, I will generally be left with a list of at least 50 ETFs ranked by six-month gain. 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 (NYSE: 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 15 million shares a day, while IAU's average volume is less than 300,000. When I am interested in gold, I will generally 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. I follow a similar process in choosing ETFs for the newsletter's second portfolio, the ETF Majors Portfolio, which replaced a portfolio previously devoted to Fidelity Select sector mutual funds in December 2009. It is made up of the most actively traded ETFs that also have the volatility characteristics described above. Portfolio Size Money Management I also might sell: * If a position is too extended from its three-month low in a declining market. I Welcome Your Questions and Comments I wish you all the best of luck in your investing. Kevin Kennedy Coolcat@CoolcatReport.com * The Coolcat Explosive Small Cap Growth Stock Report * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * 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, 1997-2010 CoolcatReport.com 
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MARKET ROUNDUP Stocks advance again on surprising data. Pending home sales jump 5.2%. Initial jobless claims fall 6,000 to 472,000. Retailers post 3.3% sales gain in August. STOCKS Google is turning to alliances with rapidly-growing social game developers like Zynga to help it fight Facebook. School stocks soar on proposed new rules For-profit education companies rose sharply after regulations had less bite than feared, but remain closer to 52-week lows than highs. Will Capella Education (CPLA) be the school stock to emerge? Company tops $15 billion in quarterly revenues as 3.3 million iPads are sold in first three months. Earnings jump 78%, sales up 61%. Chip giant flexes muscle in blowout performance, raises guidance. Dow component reports a penny better than expected; aluminum company CEO calls prospects "excellent." ETFs The three ETFs for the BRIC countries — Brazil, Russia, India and China — are lagging direct investments in the top ETFs for the four countries. Coolcat ETF Report Publisher Kevin Kennedy tells Forbes readers why it’s time to build a better BRIC.
INVESTING CoolcatReport.com Publisher Kevin Kennedy shows Forbes readers how patient investors can profit when superstar stocks take a little breather.
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. Best Investing Websites  |
