For ETF Investors: 3 Longer-Term Trends

Daily sentiment can change on a “Susan B. Anthony.” For instance, in the time that Prime Minister Mario Monti has held the reins of control in Italy, global markets have felt better about the prospect of the European Union holding itself together. At the start of Monday’s trading, in fact, stock assets around the world surged higher on the likelihood that the current power structure would remain. Yet stocks quickly reversed direction when news reports showed that Silvio Belusconi might potentially return to his former glory, as his party appeared to be winning a majority of votes for Senate positions.

Why should the Italian elections hold so much sway? Changes in leadership for the euro zone’s third largest economy could roil the recent support for the country’s reforms. Without the support of nations like Germany, Austria, Sweden and the Netherlands, the “PIGS” (Portugal, Italy, Greece, Spain) could find themselves back in the the throes of a sovereign debt meltdown; the euro zone’s stability might be at stake.

Nevertheless, it may be more constructive for a longer-term thinker to examine buying opportunities for the next significant pullback. Here are three possibilities for a forward-minded ETF enthusiast.

1. Pharmaceutical ETFs. By 2015, China will become the second-largest market for pharmaceuticals in the world. In order for the big drug companies to continue paying big dividends — figuratively and literally — the health sub-sector must expand its reach into emerging markets.

Fortunately, Pfizer and Merck are actively pursuing international relationships. Both already have existing joint ventures in China. Moreover, both are seeking additional alliances with an understanding that it is better to join local companies to benefit from synergies rather than compete on foreign soil.

Both iShares DJ Pharmaceuticals (IHE) as well as Powershares Dynamic Pharmaceuticals (PJP) contain Pfizer and Merck in their respective top 10 holdings. Both exchange-traded trackers maintain solid technical uptrends. Consider entering at a price near the 50-day moving average.

2. Timber ETFs. So much attention has been paid to homebuilders that many investors overlook the materials involved in remodeling, renovation as well as exporting. Specifically, lumber prices themselves are rapidly rising due to domestic demand as well as demand from China In fact, framing lumber prices have reached 2005 peaks.

The trouble with getting into exchange-traded funds that track indexes of lumber corporations? Both the Guggenheim Timber ETF (CUT) and the iShares S&P Global Timber/Forestry (WOOD) have largely “priced in” recent real estate recovery trends; each is more than 15% above a 200-day moving average and each would be more attractive on general pressure in the equity markets.

Form a macro-economic picture, though, increased demand for lumber is likely to remain intact. It follows that I might look to enter the position on a 10% retracement or a pull back to the 200-day. (Note: You may have to be of a similar mindset… that China is “in turnaround” and that the U.S. Fed’s policy to depress interest rates will keep lumber prices high for a few years to come.)

3. Auto ETF. Homes are not the only big-ticket items that have rocketed on the backs of low interest rates. Cars are another potent consumer durable that have seen their makers profit handsomely. In fact, January vehicle sales were nearly 10% greater than a year prior and deliveries to fewer outlets are expected to rise for the fourth consecutive year.

In the same vein as Timber ETFs, First Trust Global Auto (CARZ) has packed on super-sized gains over the last 3 months. Perhaps unfortunately, it remains roughly 15% above its 200-day trendline.

If the exchange-traded auto tracker intrigues you, you might benefit from a double-digit percentage correction in the asset. The process appears to have gotten underway, as CARZ is resting near its 50-day support. Still, you’d be wise to wait for additional profit-taking before taking a long position.

Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.