As soon as you drive a new car off the lot, the value drops by thousands of dollars. A couple of my friends are skilled enough to buy used cars, drive them for a while and sell them for more than what they paid for them.
Here I’ll replicate the same concept with exchange traded funds (ETFs). Here are my top three “discount” ETFs right now. All three come with high yields, low risk and attractive risk/reward profiles.
Consumer Staples Select Sector SPDR ETF (TICKER:XLP)
The Consumer Staples Select Sector SPDR ETF lost as much as 17% of its value since its January high. This is the biggest percentage loss since 2008. The ETF has an annual yield of 2.97%.
Even though the price dropped to a new low recently, momentum (as measured by RSI, or the relative strength index) did not. This is called a bullish divergence.
Technical resistance (red line) is around 50.10; support (green line) is around 47.50. A move above 50.10 or to 47.50 would be a first indication that Consumer Staples Select Sector is ready to move higher.
iShares 20+ Year Treasury Bond ETF (TICKER:TLT)
With 10-year Treasury yields above 3%, many are afraid of a bear market for Treasuries. At some point Treasuries will fall into a bear market, but based on investor sentiment, seasonality and technical analysis, now is not the time.
In fact, sentiment, seasonality and technicals suggest Treasury bonds are setting up for a rally. Longer-maturity Treasuries will rally stronger than short-term maturities.
The chart above plots 30-year Treasury futures against commercial hedgers’ (smart money) exposure. The smart money is betting on higher prices.
Seasonality (insert at top right) is also pointing higher.
The green trend line support is near, and according to Elliott Wave theory, 30-year Treasuries may be about to conclude a 3-wave decline.
The iShares 20+ Year Treasury Bond ETF comes with a yield of 2.59% and becomes attractive below 116.
iShares iBoxx $ Investment Grade Corporate Bond ETF (TICKER:LQD)
It doesn’t look like it, but corporate bonds have seen the biggest selling pressure since 2008. Every time the iShares iBoxx $ Investment Grade Corporate Bond suffered similar selling pressure, it performed very well in the future.
The monthly bar chart shows the ETF trading near the bottom of two trend channels.
The daily chart insert shows a potential ending diagonal, a technical pattern that often resolves with a spike higher. Momentum and volume suggest that strength is starting to build under the hood.
The iShares iBoxx $ Investment Grade Corporate Bond comes with a 3.30% yield.
A drop below 113.70 would be an attractive price to initiate a long position.
Investing is a game of odds. The more boxes an ETF (or index) checks, the better the odds of success. The above ETFs check a number of boxes (technicals, sentiment, seasonality, cycles, etc.), which makes them favorable choices.
How many boxes does the S&P 500 Index
check right now? Here is an S&P 500 analysis based on a similar set of parameters (technicals, liquidity, sentiment, seasonality).
Simon Maierhofer is the founder of iSPYETF and publisher of the Profit Radar Report. He has appeared on CNBC and FOX News, and has been published in the Wall Street Journal, Barron’s, Forbes, Investors Business Daily and USA Today.