Thursday, January 5, 2012

5 ETFs for 2012

In my last couple of articles, I discussed the growth of the ETF industry, ETFs: Love 'Em or Leave 'Em? | InvestorPlace, how to determine which are the best ETFs to invest in, ETFs: Separating the Good from the Bad | InvestorPlace.

Now, it’s time to figure out which ETFs look promising for your 2012 investment dollars. But first, let’s take a look back at the ETF marketplace in 2011.

According to Morningstar.com, here are the top 10 worst-performing ETFs for the past year:


ETF
Symbol
1-yr. Return (%)
ProShares UltraShort Silver
ZSL
-66.31
Direxion Daily India Bull 3x Shares
INDL
-64.22
PowerShares DB 3x Sht 25
SBND
-63.78
Market Vectors Solar Energy
KWT
-63.46
iPath Global Carbon
GRN
-62.47
C-Tracks Citi Volatility Index
CVOL
-62.32
Direxion Daily China Bull 3x
YINN
-62.25
Guggenheim Solar
TAN
-61.87
Direxion Daily Emrg Mkts Bull 3x
EDC
-61.30
Global X Uranium
URA
-57.27


As you can see, alternative energy and emerging markets didn’t fare too well last year.
And here are the top 10 best performers:

ETF
Symbol
1-yr. Return (%)
PowerShares DB 3x Lng 25
LBND
102.71
Direxion Daily 20 + 3x
TMF
96.95
ProShares Ultra 20 +
UBT
65.71
Direxion Daily India Bear 3x
INDZ
58.98
PIMCO 25 +
ZROZ
58.74
Vanguard Extended Dr.
EDV
53.89
Direxion Daily 7-10
TYD
44.49
iPath US Treasury 10-yr
DTYL
42.25
iPath Treasury Long Bond
DLBL
42.06
PowerShares Base Metals Dble Shrt
BOM
39.34


Huge bets on leveraged debt and treasuries were the golden ETFs of 2011. But as I said in my last article, leveraged ETFs are very risky and should be purchased only by experienced, sophisticated investors who well understand their risks.
However, it’s clear that in a year when most stock market sectors saw negative, or tepid returns, fixed income was the winner. Yet, there were a couple of equity sectors that outperformed, as shown by the next chart, and represented by various iShares ETFs:


Sector
Symbol
1-yr. Return (%)
Healthcare
IXJ
8.2
Consumer Staples
KXI
7.3
Energy
IXC
-0.3
Technology
IXN
-3.7
Telecommunications
IXP
-4.8
Consumer Discretionary
RXI
-5.3
Utilities
JXI
-8.0
Industrials
EXI
-8.9
Basic Materials
MXI
-18.4
Financial Services
IXG
-21.4

Source: SeekingAlpha.com

Both healthcare and consumer staples managed to eke out decent returns last year, but it was certainly not a banner year for equities or equity ETFs!

So let’s look ahead and see what 2012 may have in store for us.

Notwithstanding Europe’s problems, which as we have seen, can adversely and immediately affect our stock market, I believe that the economic recovery that began in 2011 is beginning to strengthen. Here’s why:

·         The economy is growing. Gross domestic product (GDP) increased by 1.8% in the third quarter of the year. While no barn burner, that is still an improvement over the 1.3% pace in the second quarter of 2011.
·         Unemployment is improving. Both initial and continuing claims were down again this week, to 372,000 and 3.6 million, respectively. And ADP job additions were 325,000, significantly more than the 180,000 predicted, although job cuts are rising, especially in financial services.
·         Housing is recovering. Construction spending for November was up 1.2%, more than double the 0.5% estimated and the 0.2% from October. It’s a far cry from a bull market in housing, but we are on the cusp of recovery for 2012, with real growth in 2013.
·         Interest rates are at all-time lows, with the Fed Funds rate hovering at 0.25% and 30-year mortgage rates averaging less than 4%, and consumers are beginning to see that these rates provide an opportunity for long-term purchases, such as housing and automobiles, as well as other durable goods.
·         Industrial production is increasing. The ISM Index for December came in at 53.9, considerably higher than the 53.2 the market expected and November’s 52.7. And the services index also increased from November. This is an important indicator, as businesses do not increase production unless they think they will have orders.
·         Prices are relatively flat. Both the CPI and PPI fell last month, to 3.4 and 5.7, respectively, showing that inflation is being kept at bay.
·         Consumer incomes and spending are growing, albeit still fairly weakly, both coming in at 0.1% for November. I believe we will see a big change in both numbers in 2012.
·         Corporations are still hoarding cash, to the tune of $998.9 billion at the end of the third quarter, according to S&P. Once that spigot opens, there will be no going back, and business expenditures will begin to fuel the economy.

And with economic recovery, comes opportunity!

We’ve seen tremendous earnings growth in the S&P 500 companies in 2011, with actual earnings beating estimates for 11 consecutive quarters. Of course, it makes perfect sense to see double-digit growth coming out of a recession. Based on low or even negative growth in many cases, it’s not difficult to see tremendous improvements.

Now, real life begins again. I fully expect earnings to continue their upward trend this year, but it would be foolish to predict the same rates of growth, since the percentage changes will be made from a higher basis.

Nevertheless, I look for continued growth in most sectors. According to a report from Bloomberg Expected Earnings Growth for Industries in S&P 500 - Bloomberg this week, here are their forecasts for sector growth in 2011 and 2012:


Sector
2011 (e) growth (%)
2012 (e) growth (%)
Consumer Discretionary
15.2
8.6
Consumer Staples
7.5
5.4
Energy
37.6
2.2
Financials
1.3
19.3
Healthcare
7.8
4.7
Industrials
17.6
13.1
Information Technology
23.2
13.8
Materials
33.5
10.6
Utilities
2.7
-2.0


With these numbers in mind—and with the economic statistics indicating a return to more robust growth—it would make sense for investors to follow that expected growth.

Consequently, I would recommend not only purchasing a broad-based index ETF, but also ETFs in the financial, industrial, technology and materials sectors. Here are a few you might find interesting, each with expense ratios less than 0.5%:

·          Financial Select SPDR Fund (XLF), -10.19% 1-yr. return, low turnover, holdings include JP Morgan, Wells Fargo, Citigroup, Bank of America and Berkshire Hathaway, giving  you exposure to large-cap financials, which generally perform very well during a recovery. An alternative or additional ETF for smaller regional bank exposure is SPDR KBW Regional Bank (KRE), 6.56% 1-yr. return, low turnover, holdings include Hudson City Bancorp, Bok Finl Corp, City Natl Corp, East West Bancorp, and First Horizon Natl.
·          Vanguard Industrial (VIS), 4.37% 1-yr. return, diversified among market caps, with its largest holdings including General Electric, United Technologies, Caterpillar, 3M, UPS and Boeing.
·          Technology Select SPDR (XLK), 8.53% 1-yr. return, broadly diversified with its largest holdings in Apple, IBM, Microsoft, Google, Oracle and Verizon.
·          Materials Select SPDR (XLB), 0.55% 1-yr. return, concentrated primarily in chemicals, metals and mining, and the largest holdings include Freeport-McMoran, DuPont, Dow Chemical, Monsanto and Newmont Mining.
Note: Performance numbers from finance.Yahoo.com and screening from etfdb.com

For investors who are looking for a bit higher risk/return ratio, you might consider the sub-categories in each of these sectors. But, as always, please do your own research to make sure that any investment you consider meets your personal goals and risk profile.





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