ETFs to Look to for Outperformance in 2010

by: Alex Khandelwal

The S&P 500 is up over 2% since the beginning of the year and my outlook continues to remain positive. As we ring in the New Year, I would like to point out a few ETFs to watch out for in 2010.

We will start with healthcare. This sector has the potential to outperform the broader market in 2010. With healthcare reform on the move, two ETFs to profit are the Rydex S&P Equal Weight Health Care (NYSEARCA:RYH) and Health Care SPDR ETF (NYSEARCA:XLV). Top holdings for both ETFs include Johnson and Johnson (NYSE:JNJ), Pfizer (NYSE:PFE), Abbott Laboratories (NYSE:ABT), and Merck (NYSE:MRK). The main difference between the two ETFs is that the XLV is market cap weighted and the RYH is equal weighted. Essentially, the RYH puts more weight on the small and mid cap companies in the sector (roughly 50 companies representing 2% of overall portfolio each). Over the past year RYH has outpaced the cap weighted XLV by a wide margin – nearly double the performance (XLV is up roughly 20% and RYH up slightly over 40%). The equally weighted offering currently looks like the more attractive investment, especially over the shorter term. Regarding the ETF operations, RYH has an expense ratio of .50% with turnover of 26% and net assets of $99 million. XLV on the other hand has an expense ratio of .22% with turnover of 4% and net assets of $2.4 billion.

Another ETF we predict will outperform the broader market is Market Vectors Brazil Small Cap ETF (NYSEARCA:BRF). This ETF invests in publicly traded small capitalization companies that are domiciled and primarily listed on an exchange in Brazil or that generate at least 50% of their revenues in Brazil. The fund recently commenced in May of 2009 and has since doubled in price. As opposed to the popular EWZ and ILF which are largely composed of commodity driven stocks, this fund gives investors exposure to sectors such as home building and consumer goods companies in Brazil.

As we move into 2010, investors are continuing to see new opportunities in sector based international ETFs as new products continue to unveil. Several new ETFs to fill this international ETF niche are offered by Global X. Some examples include the Global X China Financials ETF (NYSEARCA:CHIX) and Global X FTSE Nordic 30 which started trading in December of last year. Global X also has other international ETFs such as their InterBolsa FTSE Colombia 20 (NYSEARCA:GXG) which allow investors to gain exposure to Colombia without the rest of Latin America.

As more ETFs continue to hit the market, we will see an increase of country specific ETFs as well as specific sector based versions of these same products. It is important for potential investors to be aware of the potential pitfalls of investing abroad. Some risks of investing overseas include exchange rates fluctuations and political instability.

Disclosure: Long BRF, XLV and RYH.