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