Posted on 01/06/2012
As we do each quarter, today we will discuss sector and asset class quarterly and annual performance by reviewing these areas from an ETF perspective. The ETF world has certainly grown within the US to eclipse $1 Trillion in Assets Under Management, while the product list is over 1,300 funds domestically. With the ever-growing interest and participation in this structure it has been our preference to use our inventory of ETFs to better describe what is occurring (or in this case, has occurred) within the major asset classes each quarter. We have searched and sorted within different market categories to pull out the "winners" and "losers" of Q4 and the year as a whole. Keep in mind that we have removed leveraged and inverse funds for our lists, as well as funds with very little volume (<10,000 30 day average volume). Additionally, if there were more than two funds tracking the same (or very similar) indexes, we opted to show only the first two in order to provide the most comprehensive overview possible. The returns below exclude dividends, and include market data through 12/30/2011. We will begin our evaluation with the "Market-Based ETFs."
All of the major Market-Based ETFs (with the exception of one), ended the fourth quarter in the black, helping to make back some of the ground it lost during the third quarter. The only market-based fund that posted a loss for Q4 was the RBS US Large Cap Trendpilot ETN [TRND], which was for all intents and purposes was flat with a -0.166%. Clearly we can see that it was the Small Cap space that dominated the coveted spots on the "Best" side of the coin. Out of the top 10 funds listed to the right, 9 of them were Small- (and in some cases) Micro- Cap oriented, each posting a gain of more than 15%. On the other side of the coin, it was those ETFs driven by Large Cap that take up the majority of the bottom half for Q4. But again, even still we see positive absolute returns from all except for the TRND. Notice how the broad market, as indicated by the S&P 500 [SPX] and the S&P Equal Dollar Weighted Index [SPXEWI], also ended the quarter with double digit gains, up 11.15% and 11.86%, respectively.
One of the most interesting observations we have been able to make with regards to quarterly performance versus annual performance for 2011, is the fact that in most cases the performance tables are practically mirror images of one another. By this we mean that the best performing areas in Q4, were actually some of the worst performing for the year, and vice versa. So what does this mean? Well, essentially, we can infer that much of the improvement we saw throughout Q4 was attributed to a "Laggard Bounce" of sorts. It was those areas that had really been knocked down and out during Q3 that we able to make the most headway during Q4, and not necessarily those areas that had been able to hold up well throughout the majority of the year. With that in mind, take a look at the right side of the table below, which displays the best and worst annual returns for 2011, and notice how its the Large Cap ETFs on the top (many as high dividend, low beta plays), with several Small Cap names among the bottom.
The "mirror-effect" also seemed to prove applicable to some areas of the Domestic Sector space, meaning that there were sectors which did well in Q4 and overlapped with the "worst" for the year. Looking at the numbers below, it is no surprise that Healthcare, Utilities, and Consumer NonCyclical, were responsible for a majority of the gains to be had. Interestingly, Healthcare and Consumer NonCyclical were the two broad Dow Jones sectors which spend the most time emphasized in DALI over the past year, as they maintained a total of 8 and 9 months (respectively) with Favored Sector Status. On the other side, the worst performing Sector-based ETF for the year were mainly focused within Basic Materials and Energy (mainly clean energy). The absolute worst performing domestic Sector ETF for the year is the Market Vectors Solar Energy ETF [KWT], which was down more tha 66%. In terms of returns that are limited just to the past three months, we see that the Homebuilders ETFs lead the pack, with the iShares Dow Jones US Home Construction Index Fund [ITB] up nearly 33%. There were also several Oil related ETFs that made the top 10. The worst performers were somewhat similar to the 2011 lineup on the right, with several Basic Material plays included. Notice though, that there was some Healthcare representation with the First Trust NYSE Arca Biotechnology ETF [FBT] posting a loss of a little over 1%.
When we conducted a similar performance review at the end of the 3rd quarter, every single International ETF with at least 10,000 in average volume, excluding inverse & leveraged, finished Q3 in the "red" as well as in negative territory YTD (which at that time was thru 9/30/2011). Thankfully, we cannot say the samething about Q4, as there were several International Based ETFs that posted gains. However, there was only one that was able to pull itself up above water for the year, and that is the iShares MSCI Indonesia Investable Market Index Fund [EIDO], which finished the year up 0.72%. Again, though, we should point out how the worst performing ETFs for the year, showed up as some of the best performing for Q4. Namely, it was Emerging Market ETFs, and more specifically those focused in Asia-Pacific. The best performing International Equity-Based ETF last quarter was the the same as the entire year, the EIDO, but was followed by other Asia Pacific names that occupy the "worst" spots for the year.
From the graphic below, we see that the best performing Fixed Income ETFs last quarter are mostly High Yield and Corporates. The best performing bond ETF was the iShares iBoxx $High Yield Corporate Bond Index Fund [HYG], which was up nearly 8%. The worst performing was the iShares S&P/Citigroup 1-3 Year Intl. Treasury Bond, which was down 5.05%%. Many of the other areas towards the bottom of the heap can be categorized into the International Fixed Income group. For the year, we find that it is mainly the intermediate to longer-term US treasury products that make the cut, with the focus being on the long end of the yield curve. The Vanguard Total Bond Market ETF [BND], which serves as a fair benchmark for the asset class finished the quarter flat, but was able to post a gain of more than 4% on the year.
While we saw the greenback make strides during Q3 and into Q4, it was the Australian Dollar which came out on top for the quarter, up 5.7%, and the Japanese Yen [FXY] takes the crown for the year, up 5.08%. Although the US Dollar [DX/Y] made headway, it was not able to claim a spot among the top 5, and instead we see that for the year, the PowerShares DB US Dollar Index Bearish Index Fund [UDN] remains one of the best performing currency ETNs, despite being down about a percent. The worst performing currency year to date is the Indian Rupee [ICN], down -24%.
For the 4th quarter, the Crude Oil based funds logged very impressive returns, along with the commodity index ETPs associated with Crude Oil and Energy. The big loser once again were those ETPs associated with Natural Gas, along with the precious metals funds related to Platinum and Silver. As well, Cotton, Sugar and Cocoa were notable losers, too. For the year, the Energy ETFs of Brent Oil, Gasoline, and Heating Oil were the top performers, all with double-digit winners; following them were the Gold-related funds. The big losers once again were Natural Gas-related ETPs, along with base metals funds, along with Cocoa and Cotton.