Will Window-Dressing Reveal Some Top ETFs For Next Quarter?

"Staging" occurs in good real estate markets and bad. Specifically, a seller's agent is going to showcase the better aspects of a home to generate more interest in it. (They're also going to direct a prospect's attention away from that which is less flattering.)

I read somewhere that the practice is perfectly ethical. That, in point of fact, it is like "polishing a diamond and putting it in a different setting so that the ring might appear larger."

Of course, I recently learned that "Hot Pockets" have zero grams of trans fat. And gas-guzzling "cross-overs" get 22 miles per gallon on highways at 1:00 a.m. in the morning.

The investment world has its own version of staging and it's called, "window-dressing." Planners, advisers, financial mags and even "Mad Money" commentators talk up their winners. What's more, they carefully play down their losers.

In practice, window-dressing involves end-of-the-quarter buying of "good stuff" and end-of-the-quarter selling of bad stuff. The idea is that, in so doing, one is making the portfolio look as though it's had the better stuff "all along."

One can debate the ethics of window-dressing and/or staging till the cows fly home. In the end, most would likely conclude that the extent of diversion/deception/illusion in marketing and advertising distinguishes right from wrong.

However, I am more focused on whether "window-dressing" purchases help or hurt portfolios; that is, do the things being bought right now... at quarter's end... give us an idea of the best ETFs going forward?

On today's last day of trading in June, some of the worst performers form the first half of 2008 are being dumped. Specifically, streettracks Regional Banking (KRE) is down nearly 2% mid-day. iShares Mortgage REITs (REM) is off nearly 1.5%, while iShares Dow Jones Home Construction (ITB) is down .75%.

Ironically, perhaps, Vanguard Telecom (VOX) and iShares Dow Jones Health (IYH) are some of today's best performers half-way through this session. Each has gained nearly 1.5%. That's in stark contrast to their abysmal YTD losses of 17% and 13% respectively.

As expected, some of the year's best performers are continuing to get that window-dressing strength. Oil and Gas Exploration/Production (XOP) and iShares Global Materials (MXI) are both up 1.5%.

Unexpectedly for some, profit taking appears stronger than window-dressing in the commodity space. The Dow Jones Total Commodity Index (DJP) is down about 1% and the iShares Agriculture Commodity Index (JJA) has given up closer to 2%.

From my exploratory look into window-dressing, I discovered that, since 1995, assets which have dropped a day or two near the end of the month have outperformed going forward. Meaning... money managers and fund managers like to buy lower-priced assets on the last day of the month and the first few days that follow.

That might suggest a potential turnaround in telecom and healthcare. It might also suggest a pullback in commodities.

But I'll tell you what... I can't endorse the idea(s). For one thing, U.S. stagflation and global inflation can only keep a floor on commodities in the near-term. Oil/metals/ag may pull back. They may sell off, particularly oil. Yet the overall trend for commodities can't be whipped until global inflation is successfully tackled. (With the Fed stuck in an election year cycle, and a need to stabilize the credit crunch, they probably can't raise rates to fight inflation until late '08.)

As for telecom and health care, only a deep value player would find these sectors attractive. And in the near-term, it would appear that momentum and growth stories are the only ones likely to capture individual investor or professional investor imagination.

For me, that means more iShares Global Materials and more Dow Jones Total Commodity Index. Read more on Global Materials here.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.