These ETFs Could Signal a Return of the Risk-On Trade

The ETF Professor, Benzinga Staff Writer

July 31, 2012 8:53 AM

Tickers: GOOG

While investors are pondering what will be the next moves for global central banks, they might also be pondering something else: The veracity of the risk-on trade.

To start the year, risk-on was in style as emerging markets equities and high beta sectors helped lead the broader market higher. That trend soon gave way to the cold realities of Europe's sovereign debt crisis, China's slowing economy and the fragility of the U.S. economic recovery.

As fears regarding those issues and others set in, investors sought shelter in some predictable places, including corporate bonds and consumer staples, telecommunications and utilities sectors. While those trades have outperformed, there have recently been signs risk-on is starting to creep back into the market. If that is in fact the case, the following ETFs would likely give investors clues about just how strong the risk-on trade really is.

Market Vectors Oil Services ETF (NYSE: OIH) The Market Vectors Oil Services ETF has jumped over five percent in the past week and is now the only high beta sector ETF showing signs of leadership, according to Market Montage.

From its March peak to its July low, OIH plunged nearly 25 percent. This decline might mean that plenty of high quality oil services names are now trading at compelling valuations. Given the oil services sector's correlation to oil prices, OIH is a perfect ETF to track when searching for answers about the return of risk-on.

iShares MSCI Brazil Index Fund (NYSE: EWZ) Much maligned, Brazil and EWZ have had a rough go of things this year. Amid slowing economic growth and a political environment that has given international investors pause about Brazil, EWZ has suffered.

The ETF's substantial allocations to high-beta sectors have been a problem as well. Combined, financial services, materials and energy names account for 62 percent of EWZ's weight. Given that consideration and Brazil's dependence on China's raw materials purchases, EWZ is an important gauge of risk on sentiment. On that note, EWZ has gained around 6.2 percent in the past week.

EGShares Emerging Markets Metals/Mining ETF (NYSE: EMT) The EGShares Emerging Markets Metals/Mining ETF typically trades with relatively low volume, so the fund's inclusion on this list might come as a surprise to some. However, the combination of emerging markets and materials under one umbrella means a risk-on environment should be a feast for an ETF like EMT. By contrast for this fund, risk-off means could mean famine.

EMT's country roster makes the fund a unique way to gauge risk appetite. South Africa, Brazil, China and Russia combine for about 69 percent of EMT's weight. Downtrodden Brazilian mining giant Vale (NYSE: VALE) is EMT's top individual holding with an allocation of 10.2 percent. This fund, another example of an ETF that has recently started showing signs of life, is up 4.7 percent in the past week.

PowerShares NASDAQ Internet Portfolio (NASDAQ: PNQI) The PowerShares NASDAQ Internet Portfolio is another ETF that's volume belies its utility as a barometer of risk appetite. With a heavy weighting toward momentum stocks, PNQI is the epitome of a momentum ETF.

eBay (NASDAQ: EBAY), Amazon (NASDAQ: AMZN), Priceline (NASDAQ: PCLN), Google (NASDAQ: GOOG) and Baidu (NASDAQ: BIDU) together comprise over 42 percent of this fund's weight. Those high-flying names are not the type of stocks investors run to if they are feeling pensive about the market's current state of affairs.

Bolstering the case for PNQI as a risk-on gauge is the wide gaps in performance between this ETF and the PowerShares QQQ (NASDAQ: QQQ), the Nasdaq 100 ETF. In the past month, the two have performed almost in-line with each other, but over the past week specifically, the gap is far wider in PNQI's favor. Over other important time frames, there are also wide chasms between the two funds. QQQ usually comes out on top, but if PNQI starts outpacing its larger cousin to the upside, that could be a sign that risk is being embraced again.

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