David Trainer: Top ETF Sectors and Market Outlook

ETF Expert David Trainer discusses top sectors and his outlook for the economy and global stock markets.

John Nyaradi: Hi, everyone. I’m John Nyaradi, Publisher of Wall Street Sector Selector, a financial media site specializing in ETFs. Today, I am really pleased to welcome our special guest, David Trainer. David, welcome to Wall Street Sector Selector.

David Trainer: Thanks, John, great to be with you.

John Nyaradi: David is a Wall Street veteran and corporate finance expert. He is the author of the book, “Modern Tools for Valuation” from Wiley Finance and his stock-picking successes have been well-documented since 2005, including features on CNBC, in Institutional Investor Magazine and in Barron’s. He is a principal at New Constructs, a company focused on stock, ETF and mutual fund valuation, and he’s author of “Hidden Gems And Red Flags In The Stock Market,” a widely respected and widely read financial blog.

So David, let’s just jump in the top. You talk about how to find the best ETFs. Can you tell us how you do that?

David Trainer: Our research with ETFs is very unique because we’re actually basing our ETF ratings on the stocks that the ETF holds. And so, our ratings on the stocks drive the ratings for the ETF. If the ETF holds stocks that are given an attractive rating, then the ETF is most likely going to get an attractive rating.

John Nyaradi: We’re talking here in November, 2012. What factors do you see at work now after the election and heading into the end of the year?

David Trainer: A lot of folks are saying that the attention has now shifted — now that the election is behind us, attention shifts towards the fiscal cliff, tax issues and those kinds of things.

I don’t pretend to be able to explain what’s going on in the market day to day. I think the long term outlook is pretty bleak. You know, it’s hard to identify what is really going to drive markets up going forward. Monetary policy has essentially become ineffective. Fiscal policy is only going to be moving in the wrong direction because essentially I think it’s exhausted, we’ve squeezed as much as we can out of the federal budget in terms of trying to prop things up. We know the state and local budgets tend to be more underwater than not. And so, you know, I don’t know where growth is going to come from.

John Nyaradi: Tell us about your sector rankings.

David Trainer: Essentially, our work on stocks is very much based on data that you cannot get anywhere else. And when I say nowhere else, I mean nowhere else in the world. No one else’s work is this deep and comprehensive. And so when we aggregate this individual stock analysis up into a sector rating or an ETF rating, it’s really based on some really powerful bottom up analysis.

And one of the cool things we can do is rank sectors. You know, so for example, the consumer staples sector (NYSEARCA:XLP) in our fourth quarter sector ranking gets the number one rating out of all sectors in terms of the quality stocks and the quality of the ETFs and funds within that sector.

The number two ranking is information technology. (NYSEARCA:XLK) The worst is financials. (NYSEARCA:XLF) The second worst is utilities. (NYSEARCA:XLU) And so it’s a really unique approach based on deep fundamental analysis from stocks all the way up to the ETFs and the mutual funds.

We rate these as very attractive, attractive, neutral, dangerous or very dangerous. And obviously, we encourage people to avoid the dangerous and very dangerous and focus on attractive and very attractive.

John Nyaradi: You talked a moment ago about monetary policy. Is the Fed out of bullets?

David Trainer: I’ve been saying for awhile that the Fed is out of bullets. I mean the market essentially was completely unchanged or unmoved by QE3. You could say that there’s not that much that was accomplished by QE2. At the end of the day, the future of our country and our economy is firmly on the shoulders of the current White House Administration and Congress. Can they get the deficit cleaned up? Can they keep taxes in a place that doesn’t chase off the people that innovate and can they keep this country going?

John Nyaradi: Your business is New Constructs. Your website is Newconstructs.com. What can we expect to find there?

David Trainer: We provide ratings for free on 3000 stocks, ratings on 7000 mutual funds and 400 U.S. equity ETFs. We have a free stock screener where you can slice and dice all 10,000 stocks, ETFs and mutual funds we cover.

We also do a very interesting analysis on mutual funds, all the costs of a mutual fund taking into account upfront charges, sales charges, loads, front end loads, back end loads, redemption fees, expense ratios and transaction cost, so everything. And you know, it’s pretty surprising what we see oftentimes on some of these mutual funds in terms of what the costs are.

John Nyaradi: We’re talking here in November, 2012. What’s in your mind right now, what keeps you up at night, what should investors be watching out for as we move ahead towards the end of the year?

David Trainer: You know, I think investors are going to have to prepare themselves for shifting away from the easy money, momentum-type strategies, the pro-growth-type strategies that have made them money in the past. Having been in this business for a while, I’ve seen the markets really shift their attention away from deep fundamental analysis, due diligence is what I call it, and focus on where is the easy, quick money.

And so I think investors are going to have to go back to basics and learn how to understand balance sheets, cash on cash returns, real evaluation as opposed to just hoping to find the next hot stock or follow the hot money. Investors are going to have to be diligent and have to really distinguish between what’s a good and a bad investment, not just what’s going to be moving the next day or the day after.

John Nyaradi: Folks, we’re talking with David Trainer. He’s a Wall Street veteran and corporate finance expert, the author of “Modern Tools for Valuation.” He is widely quoted and followed in the financial media and you can learn more about David and his very interesting work just by following the link at the bottom of this interview. David, thanks for chatting with us today. It has been great and I know we’re all looking forward to talking with you again very soon.

David Trainer: Thank you very much, John.

Check out David Trainer and New Constructs.com

(recorded interview, edited for length and clarity)

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