McCall’s Call: A First-Half Checkup


The first half of 2011 is nearly in the books and investors looking back on performance during the first six months of the year are right to see a mixed picture.

Matthew D. McCall The year started out smoothly enough, but now Greece's and Europe's sovereign debt crises are back in the headlines, creating concerns that debt problems there will affect other parts of the global economy.

Also, with the Federal Reserve apparently finished with its effort at stimulating the U.S. economy, investors are fretting that the world's biggest economy won't be able to grow meaningfully on its own.

In the end, the S&P 500 is up about 2.5 percent through June 28, but the overall market return has been muted.

That said, when breaking the market down into sectors, it's clear there were distinct winners and losers, just as it's clear that ETF investors have the tools necessary to take advantage of diverging returns.

The Winners

Anything health care related was attracting money in early 2011, as equity investors looked for the perceived "safety" trade

The SPDR S&P Biotech ETF (NYSEArca:XBI) gained about 13 percent and hit a new all-time high in early June. Another niche sector ETF, the iShares Dow Jones US Medical Devices ETF (NYSEArca:IHI) also reached a high during the second quarter before pulling back. Even after the pullback, IHI is up 11.3 percent year-to-date.

The more broad-based health care ETF, the SPDR Health Care ETF (NYSEArca:XLV), gained 10.6 percent, and touched a three-year high in May.

Along with the perception that health care is a safe sector during possible rough economic times, there are other factors as to why the stocks have outperformed.

The majority of stocks in the sector trade with attractive valuations compared with the overall market, and they pay above-average dividend yields. XLV, for example, trades with a P/E ratio of 11.8 and currently pays a 1.8 percent dividend.

The dividend yield may explain why the SPDR Utilities ETF (NYSEArca:XLU) gained 5.4 percent, easily beating the market. The ETF pays a 4 percent dividend and trades with an attractive P/E ratio of 12.6. After hitting a two-year high in May, the ETF fell 5 percent before it found support and stabilized.

A surprising winner during the first half of the year was the iShares Dow Jones US Aerospace & Defense ETF (NYSEArca:ITA), which gained 7.8 percent. The sector has been flying under the radar even though the ETF hit a three-year high in May and has held up well during the recent market pullback.

It appears investors believe the multiple wars around the globe won't end anytime soon and that governments will continue to spend on defense.

The Laggards

If the first-half winners have common themes, the laggards do too:They're all related to the finance sector.

The spillover from Greece, and the eurozone's banking problems have definitely weighed on financials in the second quarter. And that was after that sector led the market during the first two months of the year.

But investors started to question the stability of banks in the U.S. and abroad and, as a consequence, began to doubt the global economic recovery. So it was that the first sector to begin falling was financials in late February.

The biggest loser was the iShares Dow Jones US Broker-Dealers ETF (NYSEArca:IAI), which lost 10.2 percent. The iShares Dow Jones US Regional Banks ETF (NYSEArca:IAT) fell by 9 percent and the broad-based SPDRs Financials ETF (NYSEArca:XLF) lost 6.5 percent.

Peripherally related to the financial sector is the iShares Dow Jones US Home Construction ETF (NYSEArca:ITB), which fell 3.6 percent in 2011.

Similar to the financial ETFs, ITB began its decline early in the year, even as the rest of the market continued its move higher. Recently ITB has been a leader-it has rallied more than 6 percent in the past two weeks even though home prices have been moving lower.

Second Half Of 2011

It's not uncommon for the leaders of the first half of a given year to turn into the laggards during the following six months. A few of the losers last year in the first half turned into the big winners heading into the end of 2010, and the same could hold true this year.

My best guess is that the market will remain in a trading range throughout the summer before the current bull market resumes in early fall. This rally would need the help of the financial ETFs and, for that reason, I think those first-half laggards could have a turn of fortune in a few months.

That said, I also continue to favor health care ETFs for the remainder of the summer, especially after the recent pullback in prices.

In conclusion, stick with the trend today and ride the first-half winners, but be prepared to roll over into the laggards as the temperature outside begins to drop.

Matthew D. McCall is editor of The ETF Bulletin and president of Penn Financial Group LLC, a New York-based wealth management firm specializing in investment strategies using ETFs.

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Copyright ® 2011 IndexUniverse LLC . All Rights Reserved.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ, Inc.

This article appears in: Investing , ETFs

Referenced Stocks: IAI , IAT , IHI , ITA , ITB



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