Q1: Small-Caps Lead Overseas, Large Growth Best In U.S.

April 02, 2009


No matter what the cap size, growth outperformed value in the U.S. But that wasn't necessarily the case overseas. The iShares EAFE Growth Index Fund (NYSE: EFG) trailed its sister iShares EAFE Value Index Fund (NYSE: EFV) by more than 3 percentage points in the quarter. Much of that was due to the fact that the latter managed to outperform the former by a full percentage point in March.

Another aspect of the Q1 results from a broad perspective is that despite Japan's troubles, Europe didn't fare much better. When markets rallied around the world in March, the Vanguard Europe ETF (NYSE: VGK) gained 7.70%, and the iShares MSCI Japan Index (NYSE: EWJ) was right behind at 7.19%. However, for the quarter, VGK fell almost as much as EQJ.

And unlike in the U.S., international small-cap stock ETFs generally did better than their larger-cap counterparts.

Reviewing Blue Chip Sectors

An interesting aspect of the growth in ETFs is that almost every style and corner of the market can now be examined through an inspection of specific funds. Perhaps nowhere is that more evident than when uncovering the major sectors of the S&P 500. The Select Sector SPDRs, for instance, divvy up the same benchmark with nine different portfolios.

The performance of each, as depicted in the table below, provides a snapshot of what took place in the opening three months of 2009.


S&P 500 Sectors In Q1



Q1 (%)


Financial Sector SPDR




Energy Sector SPDR




Health Care Sect SPDR




Consumer Staples SPDR




Consumer Discr. SPDR




Industrial Sector SPDR




Materials Sector SPDR




Technology Sector SPDR




Utilities Select Sec SPDR





The Financial Select Sector SPDR (NYSE: XLF) rebounded strongly to lead the March advance. But so did other more-cyclical industries, as represented by the Technology Select Sector SPDR (NYSE: XLK); the Materials Select Sector SPDR (NYSE: XLB) and the Consumer Discretionary Select Sector SPDR (NYSE: XLY).

Although still showing positive performances in the final month of the quarter, the other sectors didn't participate nearly as much as the three leaders in the late rally. The Industrial Select Sector SPDR (NYSE: XLI) rose 8.79% in March, but it still wound up losing more than 20% for the full quarter. That was still a far less dramatic decline than XLF's nearly 29% fall in Q1.

XLI and XLF wound up as the period's biggest losers, outdistancing even the Energy Select Sector SPDR (NYSE: XLE), the Utilities Select Sector SPDR (NYSE: XLP) and the Consumer Staples Select Sector.

Differing Results In Leveraged & Inverse Funds

Another alternative way to look at Q1 results is to consider funds using inverse and leverage to spice returns.

The tables below offer a glimpse of how different performance can look when straying beyond more-conventional long-only strategies. The first lists top performers in the quarter regardless of category or style. The second shows the same, but just for the final month in Q1.

A clear example of that is the UltraShort Industrials ProShares (NYSE: SIJ). It was the third-best performer in the quarter, returning more than 28% versus nonleveraged XLI's 20%-plus fall. And that came despite SIJ's 22.66% decline in March.

The overall breakdown of Q1 performance leaders also shows how betting wrong with leverage can work against returns. The Direxion Developed Markets Bull 3x ETF (NYSE: DZK) gained 19.33% in March. For the quarter, however, it lost more than 50%. And while the Direxion Emerging Markets Bull 3x ETF (NYSE: EDC) managed to gain 34.67% in the final month, it still wound up losing 22.22% in the quarter.

Investors who stuck with funds shorting Japan, domestic small-caps and large-cap value did especially well. Anyone investing in the Elements MLC Gold ETN (NYSE: GOE) made out like a bandit, as it produced gains of 392.34% in the quarter. Another ETN, iPath Dow Jones Copper (NYSE: JJC), was a distant second with a 31.92% return in Q1.

There's no way to tell if we're at a bottom yet, and the situation still looked pretty grim at the end of the first quarter. However, it does seem as if the market free fall begun in late 2008 has at least slowed.


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