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JimVanMeerten (63.04)

Can you mine for gems in sector ETFs?

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April 07, 2010 – Comments (0) | RELATED TICKERS: PEJ

All investors search for the "Holy Grail" of investing: an investment strategy that just can't miss. I know, I've been looking for it for over 40 years and haven't found it yet. I've had to change my strategy several times. I had a new idea recently and decided to try it out. I'd like to share it with you and see what you think.

Here's my idea: Find the sector ETF that is currently having the highest relative strength and try to hand pick the best stocks from that portfolio. It's the Willie Sutton Theory. Willie was a famous bank robber and was asked:"Why do you rob banks?" His reply: "Because that's where the money is!"

If as a group, these are the stocks performing the best then why not search for the gems in the mother lode?

This week the sector ETF having the best relative strength is the Power Share Dynamic Leisure and Entertainment ETF (PEJ). The fund is a mixture of stocks from restaurants, cruise lines, time shares, to Expedia (EXP), Home Shopping Network (HSNI) and even the World Wrestling Federation Entertainment Inc. (WWE), a basket of discretionary income stocks. A real mixed bag and since they include the word "Dynamic" is guess this is an actively managed ETF.

I used Barchart to make up a sample portfolio of the top 25 stocks in the ETF to see how it would rate and to my surprise I had 22 buy, 1 hold and only 2 sell technical ratings. Every single stock had a positive price appreciation in the last 50 days.

The ETF had a 19.34% return in the last 50 days verses the S&P 500 return of 8.95%. 22 of the 25 stocks beat the Index. The best return was Home Shopping Network (HSNI) at 66.22% and the worst was Starbucks (SBUX) at 7.81% just slightly less than the benchmark.

What do you think? Can analysing the fastest rising sector ETFs for gems be a solid investment strategy or am I following a pipe dream like trying to find the Lost Dutchman's mine somewhere in the Superstition Mountains of Arizona?

Jim Van Meerten is an investor who writes on financial matters here and on Financial Tides. Please leave a comment below or email JimVanMeerten@gmail.com.

Disclosure: I do not hold positions in any of the stocks mentioned.

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