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Number Cruncher

ETF leverages 'period of seasonal strength' Add to ...

What are we looking for?

What the fund pros are buying.

It's worth paying attention to their top securities to get investment ideas, or as a way to research the fund. Today, we look at Horizons AlphaPro Seasonal Rotation exchange-traded fund. The top holdings, which are typically shorter-term trades, are listed monthly at www.hapetfs.com.

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The $40-million ETF, which was launched by JovInvestment Management Inc. in late 2009, uses a seasonal rotation strategy overseen by its research analysts Don Vialoux and Brooke Thackray. The North America-focused ETF gained 18.5 per cent for the year ended Feb. 28 versus 13.4 per cent for the S&P 500 Total Return Index in Canadian dollars, and 24.8 per cent for the S&P/TSX Total Return Index.

The fund, which was 80 per cent in cash last summer, is now fully invested in equity ETFs because "we are in a period of seasonal strength for equity markets" that usually runs from about Oct. 28 to May 5, Mr. Vialoux said. Because this is a pre-election year in the United States, that period of strength could extend to July because the President "often does things which are favourable to the economy and stock markets," he added.

The rally, however, may not continue beyond May if the U.S. Federal Reserve Board doesn't continue to stimulate the economy beyond the $600-billion (U.S.) in quantitative easing to be completed by June, he said. "If they don't, we could see a peak in equity markets in May."

What did we find?

Two U.S. energy ETFs (HOLDRS Oil Services and SPDR Oil & Gas Exploration & Production ) posting double-digit gains of 15 to 18 per cent this year.

Mr. Vialoux also likes the Canadian-listed iShares S&P/TSX Capped Energy ETF, which is up about 9 per cent and is his largest weighting at 10 per cent of the fund. This ETF owns names such as Suncor, Canadian Natural Resources, Cenovus, Talisman and Encana.

The period of seasonal strength for the energy sector begins in January and continues until June, he said. "It has a lot to do with gasoline prices heading higher" as inventories decline because refiners are doing annual maintenance, and are converting production from heating oil to gasoline for the summer driving season, he said. Crude oil prices have also been rising over $100 (U.S.) a barrel because of the turmoil in the Middle East, he added.

U.S.-listed Market Vectors Coal ETF should benefit from the rising demand for coal due to a global economic recovery, while Japan will need more of this commodity to increase output at its coal-fired plants after the recent earthquake damaged aging nuclear reactors, he said. Coal supplies are also declining because of flooding at Australian mines and a strike at Teck Resources Ltd.'s Elkview coal mine, he added.

Mr. Vialoux also sees more potential in the U.S.-listed iShares Dow Jones U.S. Basic Materials Sector ETF which includes copper, zinc, nickel and gold miners. This ETF will benefit from a growing demand for resources, and weakness in the U.S. dollar because the commodities are priced in U.S. currency, he said. "Greater demand from China and now from Japan [to rebuild the country after the earthquake]are expected to trigger even higher prices going into the spring."

 

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