In my last couple of articles, I discussed the growth of the ETF industry and how to determine what types of ETFs are smart investments.
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 were the 10 worst-performing ETFs for the past year:
| ETF | Ticker | 1-year return (%) |
| ProShares UltraShort Silver | ZSL | -66.31% |
| Direxion Daily India Bull 3x Shares | INDL | -64.22% |
| PowerShares DB 3x Short 25+ Year Treasury Bond ETN | 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 Emerging Markets 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 performers:
| ETF | Ticker | 1-year return (%) |
| PowerShares DB 3x Long 25+ Year Treasury Bond ETN | LBND | 102.71% |
| Direxion Daily 20+ Year Treasury Bull 3X | TMF | 96.95% |
| ProShares Ultra 20+ Year Treasury ETF | UBT | 65.71% |
| Direxion Daily India Bear 3X | INDZ | 58.98% |
| PIMCO 25+ Year Zero Coupon U.S. Treasury Index Fund | ZROZ | 58.74% |
| Vanguard Extended Duration | EDV | 53.89% |
| Direxion Daily 7-10 Year Treasury Bull 3X | TYD | 44.49% |
| iPath U.S. Treasury 10-Year Bull | DTYL | 42.25% |
| iPath Treasury Long Bond | DLBL | 42.06% |
| PowerShares Base Metals Double Short | 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 a couple equity sectors outperformed, as shown by the next chart, and represented by various iShares ETFs:
| Sector | Symbol | 1-year return (%) |
| Health Care | 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% |
| Industrial | EXI | -8.9% |
| Basic Materials | MXI | -18.4% |
| Financial Services | IXG | -21.4% |
| Source: SeekingAlpha |
Both health care and consumer staples managed to eke out decent returns last year, but it certainly was not a banner year for equities or equity ETFs!
So let�s look ahead and see what 2012 might have in store for us.
Notwithstanding Europe�s problems — which as we have seen, can adversely and immediately affect our stock market — I believe the economic recovery that began in 2011 is beginning to strengthen. Here�s why:
- The economy is growing. Gross domestic product increased by 1.8% in the third quarter of the year. While no barn-burner, that still is 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. ADP job additions were 325,000, significantly more than the 180,000 predicted, although job cuts are rising, especially in financial services. And on Friday, the Labor Department reported a better-than-expected 200,000-job increase in December, with the unemployment rate dipping to 8.5%.
- 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 Standard & Poor’s. 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 this week, here are their forecasts for sector growth in FY2011 and FY2012:
| Sector | FY2011 Estimated Growth (%) | FY2012 Estimated Growth (%) |
| Consumer Discretionary | 15.2% | 8.6% |
| Consumer Staples | 7.5% | 5.4% |
| Energy | 37.6% | 2.2% |
| Financials | 1.3% | 19.3% |
| Health Care | 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 Sector SPDR (NYSE:XLF): -10.19% one-year return, low turnover, holdings include JPMorgan, 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 (NYSE:KRE), with a 6.56% one-year return, low turnover, holdings include Hudson City Bancorp, BOK Financial Corp., City National Corp., East West Bancorp and First Horizon National.
- Vanguard Industrials ETF (NYSE:VIS): 4.37% one-year return, diversified among market caps, with its largest holdings including General Electric, United Technologies, Caterpillar, 3M, UPS and Boeing.
- Technology SPDR (NYSE:XLK): 8.53% one-year return, broadly diversified with its largest holdings in Apple, IBM, Microsoft, Google, Oracle and Verizon.
- Materials Select Sector SPDR (NYSE:XLB): 0.55% one-year return, concentrated primarily in chemicals, metals and mining. Its largest holdings include Freeport-McMoRan, DuPont, Dow Chemical, Monsanto and Newmont Mining.
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.
As of this writing, Nancy Zambell did not hold a position in any of the aforementioned stocks.
Note: Performance numbers from Yahoo Finance and screening from etfdb.com.
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