McCall’s Call: A First-Half Checkup

June 29, 2011

The first half’s laggards—financial ETFs—could turn out to be a second-half surprise.


The first half of 2011 is nearly in the books and investors looking back on performance during the first six months of the year are right to see a mixed picture.

Matthew D. McCallThe year started out smoothly enough, but now Greece’s and Europe’s sovereign debt crises are back in the headlines, creating concerns that debt problems there will affect other parts of the global economy.

Also, with the Federal Reserve apparently finished with its effort at stimulating the U.S. economy, investors are fretting that the world’s biggest economy won’t be able to grow meaningfully on its own.

In the end, the S&P 500 is up about 2.5 percent through June 28, but the overall market return has been muted.

That said, when breaking the market down into sectors, it’s clear there were distinct winners and losers, just as it’s clear that ETF investors have the tools necessary to take advantage of diverging returns.

The Winners

Anything health care related was attracting money in early 2011, as equity investors looked for the perceived “safety” trade

The SPDR S&P Biotech ETF (NYSEArca: XBI) gained about 13 percent and hit a new all-time high in early June. Another niche sector ETF, the iShares Dow Jones US Medical Devices ETF (NYSEArca: IHI) also reached a high during the second quarter before pulling back. Even after the pullback, IHI is up 11.3 percent year-to-date.

The more broad-based health care ETF, the SPDR Health Care ETF (NYSEArca: XLV), gained 10.6 percent, and touched a three-year high in May.

Along with the perception that health care is a safe sector during possible rough economic times, there are other factors as to why the stocks have outperformed.

The majority of stocks in the sector trade with attractive valuations compared with the overall market, and they pay above-average dividend yields. XLV, for example, trades with a P/E ratio of 11.8 and currently pays a 1.8 percent dividend.

The dividend yield may explain why the SPDR Utilities ETF (NYSEArca: XLU) gained 5.4 percent, easily beating the market. The ETF pays a 4 percent dividend and trades with an attractive P/E ratio of 12.6. After hitting a two-year high in May, the ETF fell 5 percent before it found support and stabilized.

A surprising winner during the first half of the year was the iShares Dow Jones US Aerospace & Defense ETF (NYSEArca: ITA), which gained 7.8 percent. The sector has been flying under the radar even though the ETF hit a three-year high in May and has held up well during the recent market pullback.

It appears investors believe the multiple wars around the globe won’t end anytime soon and that governments will continue to spend on defense.


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