ETFs to Watch – May’s Hottest ETFs

by ETF Base on May 31, 2010

After one of the most tumultuous months in stocks investors have seen since the financial collapse, it’s instructive to take a look back and see which ETFs fared well through the flash crash, an imploding EU, an environmental disaster in the gulf unfolding before our eyes and a possible war brewing in the Koreas.  For perspective, during the month of May, the broad-market S&P500 (SPY) lost 8%.  I’ve included both some leveraged and non-leveraged ETFs to cover the gamut of sectors and types of ETFs in each bucket:

May’s Hottest ETFs:

SCO – UltraShort Oil – Up 36% Oil started to crash hard during the month, perhaps not so much due to the (BP) disaster in the gulf, but more so due to concerns about a global economic contraction stemming from the troubles in Europe.  As such, this ETF benefits from a declining crude trend, which while welcome to consumers, is often an indicator of the prospects for future global economic growth.

ERY – Direxion Daily Energy Bear 3X Up 35% While also tied to energy prices, ERY is actually negatively leveraged to the Russell 1000 Energy index, so it is more indicative of the operational risk associated with energy companies.  There may be an angle in this approach over playing the price of oil itself with the prospect of higher regulation and costs to the industry which could theoretically have opposing results: Higher oil costs and lower share prices of energy companies.  This may make for an interesting pairs trade but time will tell.

VXX – S&P500 VIX ETN –Up 35% – VXX provides the rare ability to capitalize on fear, regardless of sector.  As investors perceive more risk in the market and put buying starts to dramatically overtake call buying, the VIX shoots up.  Since there’s no way to play the VIX index directly without a futures account, the VXX ETN (exchange-traded note) is the next best thing.  We last saw VXX spiking to over $100 per share during the financial collapse with a steady decline since then.  In May, the move was dramatically upward.  While owning VXX is not usually a great “long-term investment” if you believe the general trend of the market will be upward with volatility declining, during moments of panic, VXX is an excellent way to net 20% in a single day like during the flash-crash for anyone following my twitter.

EUO – ProShares UltraShort Euro – Up 17% – EUO is a play on a continuously weakening Euro vs. the US Dollar.  While the dollar has had its fair share of naysayers in the face of our economic crisis, deficit spending, a new healthcare bill that will be nowhere near deficit neutral and 2 simultaneous wars, the USD still becomes the safe haven for investors globally when fear sets in.  In the case of the Euro, there are now serious doubts as to whether the Euro can even survive with the $1 Billion backstop announced in May.  Greece is in shambles with Italy, Portugal and other debt-constrained economies being called into question.  The austerity measures (see country by country list) announced during the month did little to quell the shorts.  If you foresee a continued decline, expect EUO to continue to move upward as long as the trend isn’t reversed.

GLD – SPDR Gold Trust – Up 3% – Gold is getting non-stop attention these days and not just from the late-night infomercials.  What was particularly interesting is that gold has been the perennial weak dollar and inflation play and yet in May we still saw gold rise in a strengthening dollar environment where there is no serious consideration being given to Deflation (see Deflation Investments if you believe that’s where we’re headed).  The overriding theme for May’s gold rise was neither inflation or a weak dollar, but just a general fear of fiat currency worldwide.  As crazy as it may sound now, many investors pile into the camp that there may be a complete devaluation of paper currencies around the globe, with the only true item of value being gold – hard assets.

In a down 8% month, it’s tough to tout too many non-leveraged long funds, but anything above 0% in that context is a winner for sure, so even GLD made the list.  This list somewhat sums up what some of the hottest trends were for the month.  If the adage “Sell in May and go away” is prophetic in 2010, some of these ETFs may well outperform cash or your standard long broad market ETFs.  While buying put protection become more expensive this month with volatility spiking, investors must also be mindful that holding leveraged ETFs over long periods of time is often a loser as well given the leveraged ETF decay that can occur rather rapidly and unexpectedly.

Disclosure: Author is long EUO and still holds a small position in VXX.  Long GLD after closing successful gold pairs trade with PHYS.

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