With the SPDR S&P 500 (NYSE:
) up 15.8 percent year-to-date, now is the time to drill down on
what sectors have been driving the broader market's bullish ways
and what industry groups have been laggards. It is possible that
some old laggards will become new leaders while it is also
possible that this year's outperformers will continue to deliver
alpha next year.
There is something else to note about sector
. With bond, dividend and emerging markets ETFs among the leaders
in terms of
, many sector funds are suddenly starved for attention.
Take those ETFs that are not heavily exposed to major bank
stocks or Apple (NASDAQ:
) out of the equation, and it is fair to say that, while not
forgotten, some focus has shifted away from sector ETFs in recent
months. That does not mean investors will face a dearth of
opportunities at the sector level in 2013. Actually, the scenario
is just the opposite and the following ETFs could be in focus
throughout the new year.
First Trust NYSE Arca Biotech Index Fund (NYSE:
Barring an alarming reversal of fortune, the First Trust NYSE
Arca Biotech Index Fund appears poised to end 2012 as the
best-performing major biotech ETF. Assuming no significant change
in the landscape, FBT could end the year with ahead of the SPDR
S&P Biotech ETF (NYSE:
) by over 600 basis points.
However, past performance is no guarantee of future returns.
That is worth noting, but it should be remembered that FBT, XBI
and the iShares Nasdaq Biotechnology ETF (NASDAQ:
) offer investors something many other sector funds do not:
Immunity. Immunity from the trials and tribulations of Europe's
debt crisis. Immunity from slowing emerging markets growth. And
some immunity from domestic political wranglings.
The question marks facing biotech ETFs heading into 2013 are
what will the new drug approval environment look like and
whether or not mergers and acquisitions will pick
Market Vectors Coal ETF (NYSE:
Forgive the puns, which are somewhat appropriate when discussing
coal, but it would take a Christmas miracle for KOL to finish the
year in the green. That is even with the benefit of an almost 9.5
percent gain in the past month.
Year-to-date, KOL is off 21.1 percent, but the ETF and its
constituents got some good news Tuesday when the International
Energy Agency said
coal will rival oil as the world's top fuel
source by 2017
. In other words, that means investing in a high-beta,
low-dividend sector for the long-term, a proposition that is
undoubtedly unappealing to conservative investors.
Is increased coal demand a possibility? Yes. Can KOL perform
better next year than it did this year? Well, it cannot do much
worse. The other "yes" that needs to be factored into the
equation is yes, natural gas prices are still low. The chart of
the U.S. Natural Gas Fund (NYSE:
) says as much. That puts pressure on KOL's components to produce
and sell more metallurgical coal for steel production in emerging
markets. Translation: KOL can move higher if the Chinese and
Indian economies support that move.
iShares Dow Jones US Home Construction Index Fund (NYSE:
One of 2012's shining starts among sector and sub-sector ETFs is
the iShares Dow Jones US Home Construction Index Fund. ITB has
surged 81.2 percent this year. That run has been buoyed by a
steady stream of less bad/decent housing data, including this
data point delivered Tuesday: The National Association of Home
Builders said its NAHB/Wells Fargo Housing Market index of home
builder sentiment jumped to 47 this month from a revised 45 last
month. Economists expected a December reading of 47. The December
reading is the best since April 2006
During ITB's ascent, the battle cry of the unknowing has been
the ETF is overbought. In reality, every decent dip the fund has
endured this year has been a buying opportunity. ITB faces two
tests in the new year. First, can the ETF keep moving higher even
after an 81 percent gain?
Second, the equity market is believed to be a forward-looking
indicator. Theoretically, that means ITB has told investors the
housing market could improve in earnest and do so soon. How the
ETF responds to a truly bullish residential real estate market
remains to be seen.
Market Vectors Gold Miners ETF (NYSE:
Gold is poised to extend its annual winning streak to 12
consecutive years, but it is doubtful mining ETFs will get in on
that act. In other words, barring a significant late-year
turnaround, 2012 will be another year in which gold mining ETFs
have proven vexing for investors even as gold has moved
Looking to 2013, there are some reasons why investors might
find GDX and its components alluring. Decent valuations standout
as one reason. The thesis, albeit flawed, that eventually the
miners must start following gold higher is another. Neither is a
truly compelling reason to be early to the gold miners. As
, diversified miners such as Rio Tinto (NYSE:
) are offering even better valuations than gold extractors.
Amid rising costs and a rising reputation for frustration and
being a group of laggards, gold miners have a lot to prove to
investors before this group can be considered anything more than
useful as a short-term trade.
Utilities Select Sector SPDR (NYSE:
Or any U.S.-focused utilities ETF for that matter. There are nine
select sector SPDRs ETFs and XLU has been the dog of that group
in 2012 with a modest year-to-date loss. Many investors that are
aware of the savage repudiation endured by XLU in recent weeks
pointing to fiscal cliff fears
as a primary reason for the fund's doldrums.
That is not an inaccurate assessment. Utilities are viewed as
a dividend sectors and many dividend stocks and ETFs have been
punished by fiscal cliff headlines. However, a case can be made
rich valuations have finally caught up with XLU
and its holdings
, a problem that was highlighted in June.
Even after its recent tumble, XLU has a price-to-earnings
ratio of 14.77, which is toward the higher end of the historical
range for utilities stocks. To put that in perspective, the
Technology Select Sector SPDR (NYSE:
) has a P/E of 12.98.
Financial Select Sector SPDR (NYSE:
A financial services ETF could not be left off this list, so the
group's largest fund was included. Not only is XLF the largest
ETF tracking bank stocks by assets, it has also topped its rivals
in 2012. To XLF's credit, it has outpaced the Vanguard Financials
) and the iShares Dow Jones US Financial Sector Index Fund (NYSE:
), though all three have generated truly impressive returns.
These ETFs have been helped by Bank of America (NYSE:
) almost doubling year-to-date and Citigroup (NYSE:
) surging more than 50 percent. In the case of XLF, those two
stocks combine for almost 12 percent of the fund's weight.
American International Group (NYSE:
), another XLF top-10 holding and another of the ETF's most
controversial constituents, has soared 53 percent this year as
well. In other words, in a sector laden with controversial names,
XLF is benefiting from the performances of the most notorious
financial services firms. Perhaps it will not be on a level that
is comparable to what has been seen this year, but a 2013 sequel
is possible, particularly if Bank of America does get approval
from the Federal Reserve to pay a dividend and repurchase
First Trust NASDAQ Technology Dividend Index Fund (NYSE:
One might think the appearance of a new ETF on a list chock full
of more established funds is odd, but the First Trust NASDAQ
Technology Dividend Index Fund does merit consideration as one of
the sector funds to consider for 2013 and the reasoning is quite
Not only is technology the largest sector weight in the
S&P 500, the sector is now the fastest-growing in terms of
dividends. Assume for a moment that the worst case scenario, that
being the fiscal cliff, is avoided. Investors will again embrace
dividend stocks and part of theme is finding stocks with
potential for stellar dividend growth. Enter cash-rich technology
companies such as Microsoft (NASDAQ:
), Intel (NASDAQ:
) and others.
Give TDIV some credit. The ETF debuted in mid-August and has
accumulated more than $47.6 million in assets. It has also
sharply outperformed Apple over the past 90 days. That stock is
not yet a TDIV holding, but it could be at a later date.
FlexShares Morningstar Global Upstream Natural Resources
Index ETF (NYSE:
The FlexShares Morningstar Global Upstream Natural Resources
Index ETF is one ETF that critics of the exchange-traded products
industry need to carefully examine because the fund dispels some
of the common misnomers about the ETF industry.
GUNR debuted in September 2011 and with more than $671 million
in AUM today, the fund is clearly among the top ETFs to have
debuted last year. Along those lines, GUNR is proof positive that
new ETFs can be immediately successful and that successful new
ETFs need not be issued by one of the three largest ETF
GUNR also proves that a new sector ETF can enter a crowded
arena and provide value to investors. Indeed, there are plenty of
energy ETFs on the market today, there are plenty of materials
funds and there plenty of funds such as GUNR, which combine the
two sectors. With a year-to-date gain of almost nine percent,
GUNR has outpaced popular energy ETFs such as the Energy Select
Sector SPDR (NYSE:
) and, at the very least, as performed in line with its
energy/materials combination counterparts.
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