Best And Worst Of ETFS: Year-To-Date

September 04, 2007

What trends have been driving ETF performance in 2007?

With the summer behind us, it’s a good time to look back at the market through the eyes of our data screener and see how things look from here. The tool currently has data through July 31? August data will be out in the coming days?and I thought I would focus on ETF returns as one proxy for what’s happening in the market. 

Top Performers

The Market Vectors Steel ETF (SLX) was up a whopping 43% for the first seven months, trouncing the nearest competition, the iShares Brazil ETF (EWZ), by nearly 8 percentage points. Steel has been having a good run of it lately, but it may not last much longer: MEPS International, a steel industry consultancy firm, says stainless steel producers are slashing production in response to a pricing collapse. This could cause an interesting performance turnaround in the last few months of the year for quite a few of the ETFs leading the year so far performance-wise, as steel actually appears to have been a driving force for many of them.

Top 10 ETF Performers?YTD Through July 31
Name Ticker ER 1 Mo 3 Mo YTD 2006 2005 Ave Mkt Cap P/E P/B
Market Vectors Steel Sector ETF SLX 0.55 0.41 11.86 43.05 -- -- 16845 12.7 3.5
iShares MSCI Brazil EWZ 0.74 3.41 20.41 35.29 44.27 52.46 26327 15.9 3.5
iShares MSCI South Korea EWY 0.74 10.91 24.05 35.07 11.11 55 13419 13.7 1.9
PowerShares Dyn Oil & Gas PXJ 0.64 1.86 15.87 32.41 10.01 -- 5816 15.5 3.4
iShares DJ US Oil Equip & Serv IEZ 0.48 2.92 14.92 31.08 -- -- 17598 16.3 4.0
iShares Malaysia EWM 0.57 1.53 3.46 30.32 36.2 1.6 4577 20.1 2.9
WisdomTree Intl Basic Mat DBN 0.58 0.53 10.54 28.99 -- -- 22202 15.7 3.4
PowerShares Golden Dragon Halter USX PGJ 0.71 2.42 24.04 27.07 53.1 -3.29 11201 22.8 3.4
iShares FTSE/Xinhua China 25 FXI 0.74 10.23 31.33 26.85 83.19 14.15 64798 19.7 3.5
SPDR Oil&Gas Equip & Serv XES 0.36 0.59 11.07 26.53 -- -- 7861 14.8 3.2

After steel, the next-best performers were two country iShares funds: MSCI Brazil and MSCI South Korea, both up a little more than 35%. Not surprisingly, one of the major components in SLX is also one of the major components in EWZ: Companhia Vale Do Rio Doce’s, whose ADR shares (RIO) were up roughly 70% for the year through the end of July. Currently, the company’s ADR shares and Preferred A shares are among EWZ’s top five holdings and together represent roughly 20% of the fund’s holdings. The story is similar with iShares MSCI South Korea (EWY): Steel firm POSCO’s ADR shares, a major holding in SLX, were up about 80% through the end of July, as were the shares traded on the Korea Stock Exchange, which are held in the EWY.

Two oil-services-related ETFs were ranked fourth and fifth in terms of performance: the PowerShares Dynamic Oil & Gas Services Portfolio (PXJ) and the iShares Dow Jones U.S. Oil Equipment and Services Index Fund (IEZ), up 32.4% and 31.1%, respectively. Both currently include Schlumberger and National Oilwell Varco among their top five holdings; the shares of the former were up more than 50% through the end of July, while shares of the latter had more than doubled in value. The ETF in 10th place also covers oil services. The SPDR Oil & Gas Equipment & Services ETF (XES) was up nearly 27%, and it also includes Schlumberger and National Oilwell Varco among its top five components.

The iShares MSCI Malaysia Index Fund (EWM), the sixth-best performer, was up 30.3% through July, not really surprising given recent reports that the country’s economy is on track to grow 6% in 2007, and experienced a 5.7% increase in gross domestic product in the second quarter.

Meanwhile, the WisdomTree International Basic Materials Sector Fund (DBN) came in seventh with a return of nearly 29%. Although it does not include POSCO or Companhia Vale Do Rio Doce in its holdings, some of its performance can surely be attributed to the fact that its portfolio includes several steel-related companies.

Finally, the eighth and ninth best performers both cover Chinese stocks. The PowerShares Golden Dragon Halter USX China Portfolio (PGJ) returned almost 27.1%, while the iShares FTSE/Xinhua China 25 Index Fund (FXI) was up 26.9%. Both funds include PetroChina, China Life Insurance and China Mobile among their top five components, although, with its nearly 70 components, their influence is more diluted in PGJ. The boom in China’s economy is common knowledge, and there is no doubt that the country’s demand for raw materials is likely one of the factors driving the steel industry, and thus the performance of SLX. Moreover, the recent move to open up the Hong Kong market to domestic investors may have helped pushed shares higher.


Worst Performers

Not surprisingly, the worst performers year-to-date through July were mainly ETFs related to banking and real estate. The two worst performers by far were the iShares Dow Jones Home Construction Index Fund (ITB), down almost 37%, and the SPDR S&P Homebuilders ETF (XHB), down almost 29%. Although both funds currently include homebuilder Champion Enterprises as their largest component, XHB’s other biggest components include such companies as Home Depot, Lowe’s, Ethan Allen Interiors and Sherwin Williams, while ITB includes strictly home construction companies, which have been the hardest hit in the recent housing slump.

Ten Worst ETF Performers ?YTD Through July 31

Name Ticker ER 1 Mo 3 Mo YTD 2006 2005 Ave Mar Cap P/E P/B
iShares DJ Regional Banks IAT 0.48 -8.41 -9.89 -12.04 -- -- 12995 14.1 1.9
Vanguard REIT Index VNQ 0.12 -7.77 -16.38 -13.55 35.19 12.00 6273 36.0 3.0
ProShares UltraShort QQQ QID 0.95 0.83 -4.66 -13.6 -- -- -- -- --
SPDR DJ Wilshire REIT RWR 0.26 -7.88 -16.85 -13.86 35.50 13.12 5976 31.8 2.7
iShares DJ US Real Estate IYR 0.60 -8.33 -16.47 -14.01 35.24 9.19 5914 28.6 2.6
PowerShares Dynamic Banking Portfolio PJB 0.60 -7.69 -10.00 -14.92 -- -- 4895 13.6 1.9
iShares C&S Realty Majors ICF 0.35 -7.11 -17.81 -15.07 39.04 14.14 8971 29.6 2.9
SPDR KBW Reg Bank KRE 0.36 -9.34 -9.97 -15.72 -- -- 1986 15.8 1.8
SPDR Homebuilders XHB 0.36 -12.52 -22.17 -28.54 -- -- 3458 10.7 1.2
iShares Dow Jones US Home ITB 0.48 -15.11 -26.41 -36.99 -- -- 1528 9.9 0.9

Four other real-estate-related ETFs are in the bottom ten. They include the iShares Cohen & Steers Realty Majors Index Fund (ICF), the fourth-worst performer, down almost 15.1%; the iShares Dow Jones U.S. Real Estate Index Fund (IYR), the sixth-worst performer, down 14.0%; the SPDR Dow Jones Wilshire REIT ETF (RWR), the seventh-worst performer, down 13.9%; and the Vanguard REIT ETF (VNQ), the ninth-worst performer, down 13.6%. Essentially, a weakening housing sector was driven into an even deeper slump by the subprime mortgage meltdown, and the effects have since spread to all areas of real estate.

Banking is another area hit hard by the subprime mortgage disaster, primarily because they were the ones issuing the mortgages. The SPDR KBW Regional Banking ETF (KRE) was the third-worst-performing ETF through July and was down 15.7%. Meanwhile the PowerShares Dynamic Banking Portfolio (PJB) was down nearly 15% and was the fifth-worst performer. Another regional banking ETF, the iShares Dow Jones Regional Banks ETF (IAT), was down roughly 12% and was the tenth-worst performer.

The eighth-worst-performing ETF was the ProShares UltraShort QQQ ETF (QID), which seeks to achieve twice the inverse performance of the QQQQs, which track the Nasdaq-100 Index. That fund performed better than its targeted goal, as the QQQQ was up 10.18%.

Conclusion

Looking at the first seven months of 2007, it is clear that the steel industry and economic growth in Asia, two closely linked areas, have driven the best returns on U.S.-listed ETFs. Meanwhile, the effects of the subprime mortgage meltdown have clearly taken their toll on entire sections of the ETF market. However, with a few months left to 2007, there still could be some big changes in store for ETFs before the end of the year. It’s hard not to notice, for instance, that the worst performers in 2007 so far turned in excellent returns in 2006…

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