5 High-Flying 2013 Niche ETF Sectors

December 26, 2013

High-flying ETFs in several sectors eclipsed the S&P 500 gains.

The big run-up in the equity markets this year fueled by historic low interest rates and the Federal Reserve’s economic stimulus lifted major indexes into record territory this year. The rally has also yielded a spate of sector-related ETFs that made even more impressive returns, including a popular fund that focuses on social media companies like Facebook.

Year-to-date, the S&P 500 index, Dow Jones industrial average and the Nasdaq Composite are up 28.5 percent, 24.7 percent and 37.5 percent, respectively, helped by the Fed’s zero-interest-rate policy and its ongoing quantitative easing stimulus program.

In turn, ETFs focusing on solar energy, biotech, social media and broker/dealer companies have all made the list of top-performing funds in 2013, according to data compiled by IndexUniverse.

We’ll leave the list of duds, dominated by gold miner ETFs, for our next piece.


Without further ado, the highest-flying niche ETF sectors, and some of the reasons why, are as follows:

5. FAN gained 65.8 percent year-to-date

Over the next three decades, world energy consumption is projected to increase by 56 percent, driven by growth in China and India, according to the U.S. Energy Information Administration’s “International Energy Outlook 2013.”

Clean-fuel technology is also playing an important role in the outlook, with renewable energy and nuclear power expected to grow faster than fossil fuels over the forecast period at a clip of 2.5 percent per year.

And with the Obama administration calling for more development of clean energy in the U.S., investors have caught on to this long-term trend in 2013.

Reflecting all these dynamics, the First Trust ISE Global Wind Energy ETF (FAN | C-14) has risen 65.8 percent this year.



4. IAI is up 66.5 percent year-to-date

Funds that have exposure to publicly listed firms that issue ETFs and the broker-dealers that interact with those ETF firms have also performed quite well this year.

Most notably, the iShares U.S. Broker-Dealers ETF (IAI | B-62) is up 66.5 percent year-to-date.

The fund—which Paul Baiocchi, vice president of analytics for IndexUniverse, said in a recent blog was “a more comprehensive play on the ETF industry” than any other fund—includes Morgan Stanley, Charles Schwab and Goldman Sachs as its top holding.

Its competitors, including the SPDR S&P Capital Markets ETF (KCE | B-74) and the PowerShares KBW Capital Markets Portfolio (KBWC | B-84) are up 51.7 percent and 53.7 percent, respectively.



3. SOCL is up 68.2 percent year-to-date

A couple of Internet-focused ETFs, such as the PowerShares Nasdaq Internet Portfolio (PNQI | B-72) and the Global X Social Media ETF (SOCL | C-20) have ridden market highs in 2013. PNQI and SOCL both make Facebook their top holding.

Since the beginning of the year, Facebook’s shares have more than doubled, helped by the surging S&P 500 and Facebook’s growing mobile-device penetration.

The company posted $2 billion in revenue in the third quarter, blowing away analysts’ estimates of $1.91 billion. The firm attributed its growth to its $1.80 billion revenue from advertising, a 66 percent increase from the same quarter last year. It also reported that mobile advertising revenue represented approximately 49 percent of advertising revenue for the third quarter of 2013.

In turn, PNQI and SOCL are up 68.0 percent and 68.2 percent, respectively.





2. BBH is up 67.0 percent year-to-date

Biotech funds, such as the Market Vectors Biotech ETF (BBH | A-56) and the iShares Nasdaq Biotechnology ETF (IBB | A-58) have garnered some of the best returns of all U.S. ETFs in 2013. BBH and IBB are both up 67.0 percent year-to-date.

Their returns have been fueled by increasing mergers and acquisitions, promising new drugs coming to market and more accommodative regulators willing to push all of those drugs out with greater efficiency.

“The two areas where I would expect to be more heavily involved in M&A are cancer and rare diseases, because they’re hot areas within drug development these days,” said Steve Silver, a biotech equity analyst at S&P Capital IQ.



1. TAN gained 127.3 percent year-to-date

Solar ETFs were the best-performing sector ETFs in 2013, buoyed by robust earnings related to increased sales of solar panels that have come with overall expansion of the industry.

More broadly, these ETFs have been big beneficiaries of a number of policy shifts in the Obama administration to promote alternative-energy sources, Paul Baiocchi, said in a recent podcast.

Year-to-date, the Guggenheim Solar ETF (TAN | B-35) and the Market Vectors Solar Energy (KWT | C-33) are up 127.3 percent and 94.6 percent, respectively.

“The solar space has been on an absolute rampage,” this year, Baiocchi said.


Charts courtesy of StockCharts.com


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