Each week in the ETF HQ report we look at a percentage comparison on the performance of six ETFs. This group we refer to as ‘The Influential ETFs’ because they are highly influential in dictating the markets true direction. The group is made up of four ‘Economically Sensitive‘ (SMH, QQQQ, IWM and IYT) and two ‘Economically Stable‘ funds (SPY and DIA).
Example:
The ‘Economically Sensitive’ ETFs amplify market movements rather like a Richter Scale amplifies the movements of the earth in order to warn of coming earth quakes and eruptions. While the more ‘Economically Stable’ ETFs are important to get a gauge of relative performance; to provide a benchmark.
By comparing the performance of the economically sensitive and stable ETFs we can get an indication of the true market direction because the more sensitive areas are usually the first to initiate a trend change. For example if DIA and SPY sell off heavily while SMH and IWM sell of mildly or continue moving to new highs then this would be very positive and vice versa. By viewing the raw data in this ‘% Change Comparison’ we gain a useful additional perspective over just looking at the charts.
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The Economically Sensitive:
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SMH – Holds around 20 companies and is designed to provide exposure to the semiconductor industry. Today, in the information age this is arguably the most economically sensitive industry of all because it stands at the front of the business cycle. Semiconductors suffer periods of under and over supply that are uniquely linked to the speed of economic growth.
Because technology is advancing so quickly any inventory has a very short shelf life which results in painful loses for semiconductors before any other industry during a slowdown. This is why SMH is such a fantastic leading indicator for the direction and health of the broad market. Semiconductors play a similar role to that played by the rail roads during the industrial age and are useful as part of a modern Dow Theory.
QQQQ – Holds all the stocks in the NASDAQ 100 which is made up of the largest non-financial securities listed on the NASDAQ Stock Exchange. It is often referred to as the technology index becuase it is heavily weighted in the technology sector which is particularly economically sensitive. It is not possible for the economy to perform well without creating demand for services from the technology sector and technology stocks can’t perform well without their prosperity driving up demand for semiconductors. For this reason QQQQ tends to lead the broad market and SMH tends to lead QQQQ.
IWM – Holds about 90% of the securities in the Russell 2000 index in an attempt to track its performance. The Russell 2000 represents approximately 2000 of the smallest companies by market capitalization in the Russell 3000. While the Russell 3000 represents about 98% of the investable US market the Russell 2000 represents under 10%. These smaller companies have have the ability to grow much faster than their larger competitors when economic conditions are favorable but lack the stability of the large caps to weather storms as easily.
IYT – Tracks the Dow Jones Transportation Average and is comprised of companies involved in areas like air travel, trucking, railroads, air freight etc. Despite living in the information age, people and goods must still be moved in order for the wheels of industry to keep turning. If the Transports are performing well then it means that goods are being sold and this is a positive sign just as Dow observed in the his Dow Theory over 100 years ago.
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The Economically Stable:
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SPY – Emulates the S&P 500 which is designed to represent the 500 largest publicly traded US based companies by market capitalization. Due to the size of the companies that make up the S&P 500 it has a comparatively economically stable.
DIA – Tracks the Dow Jones Industrial Average which is made up of 30 Mega Cap US companies. These are ‘Blue Chip’ stocks that are considered some of the most stable and well established companies in the world making them about as economically stable as a public company can get.
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Colors
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The colors show the rank from 1-6 with 1 being the highest:
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