Each week, I like to publish the past week's hottest
ETFs to share some new trends and niche
ETFs out there and give investors some new investing/diversification ideas. Again this week, Real Estate, Energy, Financials and Solar were the hot performers. Markets have been in a virtual upward trajectory for months now and we still haven't seen the correction many analysts have called for. While you may miss out on further upside by dumping long positions altogether, perhaps
writing covered calls while markets may be due for at least a mild correction given the recent run. Writing covered calls allows you to continue to capture moderate upside gains while providing insurance and income against a flat/declining market. Without further ado, some of last week's hottest
ETFs of the standard and leveraged genre:
DRN - Direxion Daily Real Estate 3x - Up 27% - This 3X Return Real Estate Fund was the hottest
ETF from last week, up an astounding 27% after a 22% return the prior week.
DRN is 141% since launching in July. While this sounds appealing, note that
ETFs tend to launch when their underlying sectors are hot. Real estate is just emerging from a near-collapse in the US and is rallying now. The way these leveraged
ETFs work, on the upside, due to daily balancing, they can actually
exceed a 3X total return over a brief period of time, if the run is virtually uninterrupted. However, over a long period of time, as a trend reverses (as they ultimately all do), the 3X daily return funds do not return anything near 3 times the underlying index due to daily
rebalancing. In fact, over long periods of time, they often lose as much or MORE value than the underlying sector, even during a net positive upswing. I always caution investors to understand the risks and dynamics of these poorly understood
ETFs before trading (I don't use the word "investing" with
3X ETFs - see why?).
FAS - Direxion Financial Bull 3X Shares - Up 13% - You can always count on having either
FAS (triple long) or
FAZ (triple short) Financials on the list given the volatility in the Financial sector. Financials have fared quite well recently given strong results from some of the major investment firms. With the massive moves in Financials this year, investors may be thinking about trading out of Financials in which they're still sitting on huge losses from earlier years for tax loss reasons. If considering such a move yourself, ensure that you're familiar with
wash sale rules and see how you can use
ETFs that don't qualify as "substantially identical" to avoid being subject to the provisions of the rule.
Non-leveraged ETFs:GAZ - Barclays iPath Natural Gas - Up 10% - Natural gas has on a tear in recent weeks after being severely depressed for some time given that its demand profile is divergent from that of oil and demand in the US has been very light given the recession.
GAZ has actually lost half its value
YTD. However, there appears to be a break in the trend and this makes 2 weeks in a row that
GAZ has moved upward strongly.
TAN - Claymore/MAC Global Solar Energy - Up 9% - Solar stocks have been hot for varying reasons, including a recent note on subsidies from China for solar technologies which are expected to boost revenues for shares of underlying holdings. Top holdings include the usual names you'd expect to see associated with solar plays, like First Solar, Sun Power, and a Chinese play
Yingli Green. While many of these darlings doubled, tripled or more in 2007 and 2008, they crashed hard along with the rest of the market as oil tanked.
While tan is hot this month, up 20%, YTD, TAN is actually
underperforming the S&P500.
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