With the majormarket averages up about 10-15% thus far in 2012,
it goes without saying that many exchange-traded funds (
) have risen by a similar amount. But a handful of ETFs have had a
banner year, rising at a much faster clip. The biggest gainers:
ETFs that focus on home builders, biotechnology and financial
The Year's Top-Performing Equity ETFs
The key question: Are these moves part of a multi-year uptrend
or are these funds ripe for a pullback?
Well, when it comes to home builders, caution certainly appears
warranted. New-home construction figures have surely been
impressive, but the whole housing market is still on tenuous
footing, so 2012's gain may have already accounted for any more
good news to come in 2013. Then again, economic growth in 2013 may
be so tepid, that these recent strong gainers rotate right back out
of favor, as I
mentioned nearly two months ago
The outlook for biotechnology is more durable, as sales and profits
can grow in any economic climate. Yet these biotech-focused ETFs
have been posting solid gains for several years, and considering
the ever-present business risk for the industry's key players, it's
always wiser toload up on biotechs when they are out of favor.
It may seem odd to find a group of banking-oriented ETFs among the
year's top gainers. After all, most banks are still
generatingprofit margins well below recent peaks. And the
regulatory environment is only getting stiffer in the years ahead.
Yet many banks were so remarkably cheap -- in the context ofbook
value -- that they've had nowhere to go but up. Take
as an example. Even after a strong spurt,shares still trade well
below book -- a 37% discount to book, to me more precise --
as I noted here.
The same logic applies to other banks stocks as well. By the
time theeconomy is truly healthy -- perhaps in a few years -- then
these banking stocks may trade closer to 1.5 times book value
(which is the historical industry average). This only means these
rallying ETFs still have solid upside.
Here at StreetAuthority, we're big fans of business development
companies (BDCs). These firms take stakes in a range of start-ups
and can harvest big gains if their seeds sprout into large
PowerShares Global Listed Private Equity Portfolio (NYSE:
takes the "fund of funds" approach, with stakes in a range of
This fund, which was launched in late 2006, had an inauspicious
debut, dropping roughly 80% from inception to early 2009. This was
a reflection of the deep carnage that a weak economy can inflict on
the valuations of young, unproven companies. But thisETF looks
better positioned in the context of an improving economy, as small
private companies tend to have an easier time lining up needed
financing and are less likely to hit a big cash crunch.
This ETF has posted solid gains in 2012, and would likely move
nicely higher if the economy can build a head of steam into
mid-decade. As a minor turn-off, this ETF carries a mutual-fund
likeexpense ratio of 2.37%, as its managers must actively manage
the portfolio. So this is better-suited as a long-term investment
than as a short-term trading vehicle.
The foreign ETFs
As we focus on the top-performing domestic equity ETFs, it also
pays to see what's working outside our borders. China's impressive
economic growth during the past decade continues to have
beneficiary ripple effects across Asia. Hong Kong, Singapore and
Thailand have all seen solid market gains this year, as their
economies cultivate rising middle classes.
And it should come as no surprise that Turkey and Colombia
remain top performers, thanks to their solid regional positioning
and expanding middle classes. These two countries are among the
which I first profiled here
Risks to Consider:
As they say, past performance is noguarantee of future
performance, especially for the hottest ETFs such as the ones that
focus on home builders.
Action to Take -->
These ETFs are benefiting from powerful current trends, so you need
to assess how those trends will likely play out in 2013 and 2014 to
see how these surging ETFs are could fare. Only a handful look set
to lead the pack again in 2013.
-- David Sterman
P.S. -- Business development companies aren't the only way that
retail investors can access the previously untouchable private
market. In fact, another investment gives you a backdoor into the
market where Mitt Romney made his millions. For years, this arena
has been off-limits to investors like you and me. But thanks to
StreetAuthority's latest research, we've found a way you can access
this underground market. You can learn more about BDCs -- and this
"second" way to access the private markets -- by clicking here
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
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