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What These Winning Investments Can Teach You

After a huge rise in the first quarter and the almost equally large drop we've seen in the past few weeks, the stock market is almost right back to where it started the year. The trend of immense volatility without much in the way of tangible results is nothing new to investors, who've had to deal with such conditions ever since the 2000 bear market began.

But amid the wreckage from the plunge in stocks so far in May, some pockets of the market have maintained strong gains. By looking where investors have managed to hold onto significant profits, you can get some insight into what the future may hold for the companies they've trusted to bring them gains.

Looking at the ETF universe
One easy way to get a sense of how certain sectors is to look at the performance of exchange-traded funds. In contrast to looking at simple stock screens, where a single outlying company can have fluky success, performance in ETFs usually indicates a broader benefit that an entire sector is enjoying.

From the top performers on that list, you can draw several conclusions:

  • Natural resources stocks, particularly gold miners and natural gas producers, have gotten absolutely hammered so far in 2012, benefiting those who used bearish-betting strategies to profit from declines.
  • Biotech stocks have managed to post solid gains and haven't given them back over the past month.
  • Mortgage REITs have seen decent gains even as dividends start to slack off.

Let's address these sectors in turn.

Not all that glitters
Investing in commodities can be unpredictable, and 2012's experience in the area provides an excellent example. After starting off the year in a slump, precious metals rebounded sharply to start off the year. But mining stocks largely failed to follow suit, as a combination of asset writedowns, rising production costs, and company-specific production problems have depressed mining stocks in comparison to the price of bullion. At the same time, natural gas prices plunged to decade lows, and scandals at Chesapeake Energy (NYSE: CHK  ) have done nothing to inspire confidence in the sector.

For longtime commodities investors, down cycles like these are nothing new. Leveraged ETFs have proven to be a lucrative way to play the moves, as they've involved extensive periods of declines rather than sharp rises and falls. With natural gas having finally hit bottom, though, and gold having performed well even in a down market over the past couple of days, bearish bets on commodities going forward could well burn you.

Biotech bingo
It's been a good year in the biotech space. Amylin (Nasdaq: AMLN  ) has more than doubled on speculation that it would get a takeover bid after having its Bydureon diabetes drug approved, while Human Genome Sciences (Nasdaq: HGSI  ) rebounded from huge losses last year after GlaxoSmithKline took a buyout offer directly to shareholders. Meanwhile, Regeneron has seen sales of its Eylea macular degeneration treatment come in much higher than expected.

All these pops and several others show the volatile nature of the biotech industry. When good things happen, they usually bring huge wins for shareholders. But when bad news comes, it can utterly destroy a stock. Increased merger activity from big pharma stocks seeking to diversify their pipelines could bring continuing interest -- but only for those companies with promising products.

The dividend hunger continues
Mortgage REITs have had their doubters lately, as better economic prospects raised the specter of sooner-than-expected interest rate increases that could endanger their business model. But so far, Annaly Capital (NYSE: NLY  ) and American Capital Agency (Nasdaq: AGNC  ) have led the mortgage REIT sector to share-price gains even before considering their plentiful dividends.

The lesson here is that calls for a reversal of fortune for a sector can be premature. Investors have benefited from double-digit yields for years, and while rates will eventually need to rise, you can never be sure exactly when the music will stop -- and if you get out too early, you'll miss out on additional gains.

Keep watching
You don't have to invest in ETFs to learn from them. Just by watching the trends that they're following, you can get a measure of the market and discover interesting sectors that you might otherwise have overlooked.

But ETFs aren't the only place to find great investing ideas. Take a gander at The Motley Fool's special report on retirement, and you'll find three time-tested stock names you won't want to miss. Don't wait -- click here and start reading your free copy right now.

Fool contributor Dan Caplinger likes ETFs both for investing and learning. You can follow him on Twitter @DanCaplinger. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Annaly Capital and Chesapeake Energy. Motley Fool newsletter services have recommended buying shares of Annaly Capital and Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy is always learning.

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