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Go where the experienced players are putting money.
There are many great things about ETFs, and that includes the ability to see whether money is flowing in or out of them, just like you can with mutual funds. By tracking inflows and outflows, you can gauge market sentiment, particularly if one sector suddenly sees a huge spike.
Because its an ETF as opposed to just a single stock, the sentiment angle has value. One never knows why people are buying or selling a single given stock, but an entire sector, or a given investment arena represented by an ETF can tell you a lot. It may not even relate to the overall market, but to specific areas that are overbought or oversold.
I’m seeing inflows into these three ETFs, and I think the influx of investment dollars into each tells us something about both the sectors they represent and the overall market. So pay close attention.
3 ETFs for the Contrarian Investor
1. ProShares UltraShort 20+ Year Treasury (NYSE:TBT)
ProShares UltraShort 20+ Year Treasury (NYSE:TBT) is an ETF that not only shorts long-term Treasury bonds, it’s a leveraged ETF that aims to return twice the Barclays US 20+ Year Treasury Bond Index.
It is particularly interesting to see inflows here, given that the security is down 23% YTD and 16% over the past year. The play here seems to reflect sentiment related to the Fed’s tapering of bond purchases. In theory, if the Fed continues to back off its bond purchases, then bonds will have less support to hold prices up, and thus, prices will drop.
Because the ETF is down YTD, that theory has yet to come to pass. Perhaps the influx of cash suggests that the expected decline in bond prices is around the corner.
2. iShares International Select Dividend (NYSE:IDV)
iShares International Select Dividend (NYSE:IDV) tracks the Dow Jones EPAC Select Dividend Index, which invests in non-US equities that pay high dividends. It’s a broadly diversified index, up 8.6% YTD, that yields 4%. About a third of its holdings are in UK and Aussie stocks, the latter of which are undervalued and paid out over $40 billion in dividends in 2013. That was double the amount in 2012.
The smart money seems to be moving here as US stocks get stretched. The perception that foreign markets are cheap, particularly Australia, is likely some of the reason for the move. Investors are also likely seeking more diversified exposure, venturing into developed nations so as not to get stuck if the US market corrects.
Consistent with the fear of an overbought market, there’s been an influx of cash into the iShares US Utilities (NYSE:IDU) ETF. This is a straight-up play on a basket of US-based utility stocks.
Utilities are generally seen as more defensive plays, as they tend to generate consistent revenue, because they are granted consistent price increases by local regulatory authorities. Regular income means regular dividend payments. Utilities also tend to carry a lot of debt, so with the low-interest rate environment likely to continue, investors like what they’ve seen from utilities.
In this case, IDU pays a 2.09% yield, but the ETF is up 18% YTD. One wonders if this isn’t just people piling into a well-performing sector, and thus proves to be a contrarian signal.
3. SPDR Gold Shares (NYSE:GLD)
Finally, we have SPDR Gold Shares (NYSE:GLD), everyone’s favorite and easiest play on gold. The yellow metal has snapped back off some recent lows, bouncing back into the $1,300+ zone, and investors are buying up the ETF again. It’s always difficult to say exactly why precious metals prices move, but they are often tied to economic sentiment.
With the Q1 revised GDP coming in at -2.9%, and retail data reflecting consumer reluctance to spend money, there may be significant fears building that we are headed for another recession. I’m inclined to follow that train of thought, given the continued increase in people leaving the workforce. I think buying SPDR Gold as a hedge against a cratering economy makes some sense.
Lawrence Meyers does not own shares in any security mentioned.
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