Overbought ETFs: Buy These Two Anyway

In the financial markets, the term overbought can be off-putting to some investors. To some, learning that a stock, commodity or ETF is overbought could mean that security has run to levels not justified by the underlying fundamentals. Conversely, simply because a security is overbought does not mean an imminent decline is in the offing. Take the examples of several marquee members of the Dow Jones Industrial Average. Two weeks ago, stocks such as International Business Machines IBM, McDonalds' MCD and Travelers TRV were deemed overbought. Yet, all have kept going up, helping the Dow to a record high in the process. That is a simple way of saying that simply because a security is overbought investors do not need to ignore it until it becomes oversold. A screen for ETFs with relative strength index readings of 70 or higher trading within five percent or less of their 52-week highs was conducted. Less than 40 funds showed up, but some are worth nibbling at right now. First Trust Consumer Staples AlphaDEX Fund FXG Simply put, 2013 has been a banner year thus far for the staples sector. A year-to-date gain of better than 11 percent for the Consumer Staples Select Sector SPDR XLP proves as much. As impressive as XLP has been, the First Trust Consumer Staples AlphaDEX Fund has been even better with a 12.5 percent gain. The reasons for this outperformance are easy to identify. For starters, is not as heavily allocated to slow-moving, low beta names such as Procter & Gamble PG and Coca-Cola KO as XLP is. In fact, Coke is not even a member of FXG's lineup and P&G represents less than one percent of the ETF's weight. What that means is FXG is more biased toward some of the more volatile staples names such as Safeway SWY and Green Mountain Coffee GMCR. Of course that means FXG is more volatile than XLP, a fact proven by FXG's three-year standard deviation being 250 basis points above that of the S&P 500 Consumer Staples Index. However, in an environment where staples are a leadership group, FXG is ideally situated to continue to the upside. Guggenheim Defensive Equity ETF DEF Maybe it is because the Guggenheim Defensive Equity ETF has just over $82 million in assets under management or maybe it is because the ETF trades an average of less than 31,000 shares per day that this fund does not garner more attention. That is a shame because DEF is up more than 10 percent this year. What DEF really needs is a name to change so it can be recognized as a participant in the low volatility ETF craze. After all, this is a legitimate "low vol" ETF. DEF's beta is just 0.55 against the S&P 500 with a standard deviation 560 basis below that of the benchmark U.S. index, according to Guggenheim data. Not to mention, utilities and consumer staples combine for over 48 percent of DEF's sector weight. Investors will also want to note DEF is not as boring as the aforementioned traits imply as the fund does offer decent international exposure as well. Three of DEF's top-20 holdings are international stocks. To DEF's credit, the fund does a decent job of mixing its non-U.S. exposure among developed and emerging markets. For more on ETFs, click here.