This time last year, investors were generally thrilled with the performances of their portfolios, which had continued to bounce back nicely from the devastating recession that hit in 2008. Unfortunately, few are feeling the same sense of accomplishment as 2011 draws to a close; this year has been frustrating in that a few large, swift sell-offs erased any gains that had accumulated, leaving many risky asset classes in negative territory for the year [see also Checking In: Top 5 Equity ETFs of 2010].
Continued concerns about the fiscal health of Europe have weighted on markets around the globe, demonstrating once again just how intertwined global markets are and how struggles in one corner of the globe can translate into difficulties elsewhere. Through December 20, the S&P 500 SPDR (SPY) had managed to squeeze out a small gain on the year–which was considerably better than popular international equity ETFs. Emerging markets, as measured by EEM, had lost almost 20% on the year, while the EAFE region had been dragged down by Europe, losing about 13%.
|SPY||S&P 500 SPDR||+0.6%|
|EEM||MSCI Emerging Markets ETF||-19.3%|
|EFA||MSCI EAFE ETF||-13.2%|
|*As of 12/20/2011|
There have, however, been a few bright spots in 2011, as a small handful of asset classes have posted surprising gains on the year. Many of the best performers from the universe of hundreds of equity ETFs have been off the beaten path–asset classes and investment strategies that aren’t often at the core of long-term portfolios. Below, we highlight some of the pleasant surprises of the last year:
10. Morningstar Dividend Leaders Index Fund (FDL): Up 11.7%
This ETF performed quite well last year as investors flocked towards dividend-paying stocks in times of uncertainty. FDL is linked to an index comprised of companies that have shown dividend stability and consistency historically, a methodology that should result in more stable firms capable of weathering economic storms. FDL has a 30-day SEC yield of about 4%–a handsome current return in this environment.
9. Consumer Staples AlphaDEX Fund (FXG): Up 12.4%
This ETF also comes from First Trust, utilizing the company’s AlphaDEX methodology to tap into a corner of the U.S. market that is generally known for stability. The FXG portfolio consists of about 35 consumer staples stocks, including food and beverage retailers, food manufacturers, household products companies, and tobacco companies. Other ETFs in the Consumer Staples ETFdb Category, including the Consumer Staples SPDR (XLP), have also turned in strong performances in 2011.
8. E-TRACS Alerian MLP Infrastructure Index (MLPI): Up 12.4%
Similar to some other products on this list, MLPI has likely benefited from the increased interest in high-yielding securities. Thanks to some unique tax advantages, MLPs generally make hefty dividends to shareholders. And because of the nature of revenues generated, this asset class also tends to be rather stable; it isn’t subject to movements in spot commodity prices in the same way traditional oil and gas companies are.
It is interesting to note the significant performance gap between this ETN and AMLP, an ETF linked to the same index. The ETF was up a less impressive 6.3% through December 20, the result of the structural differences between the two.
7. FTSE NAREIT Residential Index Fund (REZ): Up 13.5%
Some investors have moved away from real estate in recent years, but this member of the Real Estate ETFdb Category has performed quite nicely in 2011. REZ, which focuses on real estate firms engaged in the ownership of apartment buildings, storage facilities, and health care property, has thrived as rental prices have been surprisingly firm.
6. Barclays ETN+ S&P VEQTOR ETN (VQT): Up 14.7%
This is another quirky exchange-traded note; VQT is “dynamic” in the sense that it actually shifts exposure across various asset classes depending on market conditions. Basically, the exposure offered is a blend between equities and volatility futures, with the allocation to each depending on factors such as level of the VIX and recent volatility trends. That methodology has worked out quite nicely, as VQT held up during the chaotic stretches this year thanks to the position in VIX futures.
5. E-TRACS S&P 500 Gold Hedged ETN (SPGH): Up 14.9%
This ETN is one of the more unique products out there; SPGH combines equal positions in the S&P 500 Total Return Index with long positions in near-term COMEX gold futures contracts, with a monthly rebalance (so it’s technically a hybrid ETN, and not a pure play equity product). The impressive delta relative to SPY is attributable primarily to the gold exposure, as the precious metal has performed quite well on the year (despite some recent weakness).
4. Utilities ETF (VPU): Up 15.9%
Continuing the trend of high-yielding, low volatility standouts in 2011 is VPU, which offers broad-based exposure to the domestic utilities sector. Utilities might not be quite as sexy as tech stocks or energy companies, but the high dividend yields and relative stability have been a boon to investors in 2011.
3. Market Vectors Biotech ETF / HOLDRS Biotech (BBH): Up 17.7%
This product isn’t a true ETF–at least not for the majority of 2011. BBH has historically been one of the HOLDRS offered by Merrill Lynch, and has only recently been converted into a Market Vectors ETF (the ticker remains the same). Prior to its conversion, BBH had big allocations to Amgen (35%), Biogen (29%), and Gilead (24%). Though the more balanced approach taken under the new structure will no doubt be appealing to many investors, those big concentrations served this fund quite well in 2011.
2. HOLDRS B2B Internet (BHH): Up 17.7%
This entry on the list comes with an asterisk, as BHH is neither a true ETF nor is it expected to be around for much longer. In conjunction with the conversion of several HOLDRS to Van Eck ETFs, some of the less popular HOLDRS products are being shuttered. With only about $16 million in assets, BHH is headed for extinction shortly. That’s too bad for investors who had held this product: BHH has delivered cumulative returns of more than 400% over the last three years, and nearly 200% over the previous five years.
Fortunately, it won’t be that difficult to replicate the portfolio this product maintained; BHH consists of only two stocks: Ariba, Inc. (about 94% of assets) and ICG Group (about 6%). In other words, the returns are attributable almost entirely to a single stock (ARBA).
1. Dow Jones U.S. Pharmaceuticals Index Fund (IHE): Up 19.9%
Pharmaceutical companies have surged higher in 2011, as this corner of the market has benefited from a resurgence in M&A activity, some positive regulatory developments, and expectations for increased demand for prescription drugs as the U.S. population continues to age. The IHE portfolio consists of about 40 individual companies, including Johnson & Johnson, Pfizer, and Merck.
Returns among other pharma ETFs, including PPH, XPH, and PJP – vary dramatically on the year, highlighting the potentially major impact of seemingly minor differences in products covering sectors of the global economy.
Disclosure: No positions at time of writing.
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