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

April 02, 2009

Among diversified stock ETFs, investors favored emerging markets and growth in Q1. But some sector and alternative funds also outperformed.

 

A broad rebound in stocks at the end of the first quarter of 2009 helped to dampen heavy losses in the early going. But in most cases, a three-week rally in March didn't come soon enough or prove deep enough to overcome the damage of the previous two months.

After getting pummeled in 2008 as the S&P 500 index dropped 37%, investors were greeted in January with an 8.43% decline in returns in blue chip stocks. It got even worse in February as the two-month total returns on the benchmark stood at -18.18% entering the final month of the quarter.

In March, U.S. markets staged a double-digit comeback. The S&P 500 returned 8.76% as every sector felt the positive ripple effect of an easing in global credit markets and optimism that U.S. economic fortunes were on the mend.

Still, the S&P 500 entered the spring quarter with a total return for the year of -11.01%. That's a heavy headwind for investors searching for signs of a bottom. Will they get it in the second quarter? Only time will tell. But several positive areas of the market did begin to reveal themselves in the opening three months of 2009. Let's take a closer look at where those cracks in this recession's armor seemed to open the most.

Taking A Bird's-Eye View

We'll start with a review of the major stock asset classes, using broad strokes with representative exchange-traded funds to paint the first quarter's picture.

As depicted in the chart below (using a combination of data supplied by index providers, fund sponsors and Morningstar Inc.), emerging markets soared way ahead of virtually every other diversified long-only category.

The iShares MSCI Emerging Markets Index (NYSE: EEM), for example, rallied some 16.86 percentage points in the final month to nearly break even for the first three months of the year.

But it's important to note that while EEM remained the most popular ETF to cover developing economies, it wasn't the top performer among its peers. The Vanguard Emerging Markets Stock ETF (NYSE: VWO) didn't rise as much in March, but it didn't stumble as badly as the others earlier in the year. As a result, VWO came out of the first quarter with a return of -0.04%.

 

A Glance At Q1 By Asset Class

Fund

Ticker

Q1 (%)

March (%)

PwShares QQQ

QQQQ

2.11

10.31

SPDR S&P 500

SPY

-11.19

8.32

Vanguard Value

VTV

-16.85

8.20

SPDR Mid Growth

EMG

-2.75

8.59

iShares Mid Value

IJJ

-11.74

7.66

Van Small Growth

VBK

-8.31

9.32

iSh Russ 2000 Val

IWN

-19.29

8.73

iShares Russ 2000

IWM

-14.31

7.77

iShare Emer Mkts

EEM

-0.64

16.86

iSh Int'l Small Cap

SCZ

-11.98

9.69

SPDR Int'l Small

GWX

-13.67

8.22

iShares EAFE Gro

EFG

-14.81

7.92

iShares EAFE

EFA

-16.21

8.39

Vanguard Europe

VGK

-16.84

7.70

iShares Japan

EWJ

-17.54

7.19

iShare EAFE Value

EFV

-18.32

8.98

 

The other big winner among broad asset classifications was Tech. The PowerShares QQQ (Nasdaq: QQQQ) actually managed to finish in the black in Q1, thanks to a last-minute 10.31% push to end the quarter. Again, it wasn't the leader, as several other Tech-focused ETFs did even better. The First Trust Nasdaq-100 Tech Index ETF (Nasdaq: QTEC), which follows a more concentrated benchmark, scored a 10.46% return at quarter's end. Other large-cap-focused Tech funds doing well included:

  • The Internet HOLDRs (NYSE: HHH), up 8.67% in the quarter and 13.54% in March
  • The iShares Dow Jones U.S. Technology Index (NYSE: IYW), which gained 5% in Q1, with an 11.91% push in March
  • The ProShares Ultra Technology ETF (NYSE: ROM), which used leverage to boost its participation in the quarter-ending rally to return 22.32% during March. That boosted its full-quarter gains to 4.51%.

And those were just the large-cap-oriented broad tech ETFs. Several more in the mid-cap range did well, including: The Rydex Equal-Weight Technology ETF (NYSE: RYT), up 6.39% entering Q2; The PowerShares NASDAQ Internet Portfolio (Nasdaq: PNQI), up 9.67% for the first quarter; and the First Trust NASDAQ-100 Equal-Weight Index ETF (Nasdaq: QQEW), which gained 1.79% in Q1.

 

 

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

Name

Ticker

Q1 (%)

March

Financial Sector SPDR

XLF

-28.94

17.06

Energy Sector SPDR

XLE

-10.63

3.78

Health Care Sect SPDR

XLV

-8.26

5.99

Consumer Staples SPDR

XLP

-11.09

4.24

Consumer Discr. SPDR

XLY

-8.43

12.68

Industrial Sector SPDR

XLI

-20.57

8.79

Materials Sector SPDR

XLB

-1.76

15.34

Technology Sector SPDR

XLK

1.86

11.17

Utilities Select Sec SPDR

XLU

-11.02

1.90

 

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.

 

 

Top 20 Performers In The First Quarter 2009

Fund

Ticker

Q1

March

Elements MLC Gold ETN

GOE

392.34

20.81

iPath DJ Copper ETN

JJC

31.92

19.77

UltraShort Industrials

SIJ

28.02

-22.66

UltraShort Japan ProShs

EWV

28.01

-18.52

iPath DJ AIG Lead ETN

LD

25.52

20.09

Ultra Silver ProShares

AGQ

23.78

-4.37

UltrShrt Rus 2000 Value

SJH

23.18

-24.24

United States Gasoline

UGA

22.76

2.22

UltraShrt Rus 1000 Val

SJF

22.29

-21.48

UltrShrt SmallCap 600

SDD

20.86

-22.15

Direx Dev Mrks 3x Bear

DPK

20.67

-32.04

E-TRACS Metals ETN

UBM

20.64

19.77

E-TRACS Silver ETN

USV

19.03

1.20

UltraShort EAFE

EFU

18.97

-22.40

iPath DJ Platinum ETN

PGM

18.40

5.02

E-TRACS Long Platinum

PTM

18.37

5.43

UltraShort Dow 30

DXD

17.85

-18.12

UltraShort Cons. Goods

SZK

17.83

-11.98

PwSh Crude Oil Dbl Shrt

DTO

17.78

-12.64

B2B Internet HOLDRs

BHH

17.39

-3.57

 

Top 20 Performers in March

Fund

Ticker

March (%)

Q1 (%)

Direxion EM Bull 3x

EDC

34.67

-22.22

Direxion Tech Bull 3x

TYH

32.37

-1.32

iShares South Korea

EWY

30.55

1.75

Claymore Global Solar

TAN

29.72

-20.87

Ultra Semicond. ProShrs

USD

28.73

5.03

PwShrs Finan. Preferred

PGF

28.20

-25.24

PwShrs Metals Dbl. Lng.

BDD

27.96

16.54

Ultra Materials ProShrs

UYM

26.24

-16.46

Rydex 2x Technology

RTG

25.42

2.88

Market Vectors Solar

KWT

23.64

-19.49

WisTree ex-Japan Pac.

DNH

22.38

-5.63

Ultra Tech ProShares

ROM

22.32

4.51

PwShrs Metals Long

BDG

22.24

11.39

AlShrs China Real Estate

TAO

22.05

0.30

Rydex 2x Financial

RFL

21.45

-61.04

iShares South Africa

EZA

21.45

-3.45

Market Vectors Russia

RSX

21.33

7.50

iShares Preferred Stock

PFF

20.99

-20.29

iPath Global Carbon

GRN

20.96

-22.32

Global Exchges, Brokers

EXB

20.94

-8.13

Sources for graphs: Morningstar Inc., sponsors and index providers

 

 

 

 

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