ETF Performance YTD: The Good, the Bad and the Ugly

So far, 2007 is shaping up to be the year of the emerging markets in the exchange-traded fund and exchange-traded note arena. Depending on your frame of reference, eight or nine of the 10 best-performing funds (and ETNs) in the IndexUniverse.com database for the first 10 months of 2007 cover emerging markets.

Not surprisingly, the top performer, hands down, is the iShares FTSE/Xinhua China 25 ETF (NYSE: FXI), which was up a rather stunning 91.70% at the end of October. Another China ETF came in third for the same period: The PowerShares Golden Dragon Halter USX China Portfolio (AMEX: PGJ) was up 86.60%. China, of course, is a very hot market right now, so the performance of these funds is about as surprising as finding sand at the beach.

However, emerging markets and the BRIC (Brazil, Russia, India, and China) countries, in particular, generally seem to be doing well. The Claymore/BNY BRIC ETF (AMEX: EEB) was the fourth-best performer for the 10 months and was up 82.52%. It was followed by the iShares MSCI Brazil ETF (NYSE: EWZ), up 82.08%, and the iPath MSCI India ETN, up 63.40%. Russia, the fourth BRIC country, does not have its own ETF or ETN.

It looks like the BRIC countries might have been dragging other emerging markets upwards. The fifth-, sixth- and seventh-best performers are also emerging markets funds. The iShares S&P Latin America 40 ETF (NYSE: ILF) was up 56.73%; of course, 17 of the underlying index's 40 stocks are Brazilian, and at the end of June, Brazil represented more than 57% of the index's market capitalization. The BLDRS Emerging Markets 50 ADR ETF (NASDAQ: ADRE) was up 56.38%. This is also not surprising given that the fund's holdings included stocks from all four BRIC countries, with Brazil weighted at almost 29% as of September 30, followed by China at 11.18%, India at 6.34% and Russia at 2.07%, for a total BRIC weighting of 48.11%.

The Vanguard Emerging Markets ETF (AMEX: VWO) returned 51.71% for the first 10 months of 2007, and it had a 41.7% weighting in BRIC countries as of September 30. Perhaps most interesting about this fund's performance is the fact that the iShares MSCI Emerging Markets ETF (NYSE: EEM), which also tracks the MSCI Emerging Markets Index, was up just 44.50% for the same time period, although its BRIC weighting was in fact slightly higher than that of VWO. Incidentally, VWO has about $6.27 billion in assets compared to $28.49 billion for EEM.

The tenth-best performer for the 10-month period was the iShares MSCI South Korea ETF (NYSE: EWY), which was up 48.58%. Although South Korea is classified as a developed market by some index providers, such as S&P and Dow Jones, others such as FTSE and MSCI classify it as an emerging market.

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Moving to the other end of the spectrum, the worst-performing ETF for 2007 through the end of October was a runaway loser: the iShares Dow Jones U.S. Home Construction ETF (NYSE: ITB) was down 50.26%, underperforming the next-worst performer - the SPDR S&P Homebuilders ETF (AMEX: XHB), down 39.92% - by more than 10 percentage points. Once again, not terribly surprising. The home construction industry has been slammed lately. However, ITB and XHB were up 5.39% and 4.08%, respectively, for the month of October, indicating that the sector may have finally hit bottom and started to turn around.

As we have excluded inverse leveraged funds, which can dominate the bottom of the performance rankings largely by design, beyond the homebuilder ETFs, the bottom ten include a lot of financial ETFs. The PowerShares Dynamic Banking Sector Portfolio was down 14.16% (AMEX: PJB), while the iShares Dow Jones Regional Banks ETF (NYSE: IAT) and the SPDR KBW Regional Banking ETF (AMEX: KRE) were both down 13.99%. The SPDR KBW Bank ETF (AMEX: KBE) was down 9.59%, and the iShares Dow Jones Financial Services ETF (NYSE: IYG) fell 8.56%. All of these funds also showed negative returns for the one-month period. The main reason would be the continuing fallout from the subprime mortgage market meltdown and the resulting credit concerns.

Indeed, of the 15 worst-performing ETFs year-to-date through October, 10 cover the financial industry. With the full effects of the disaster still unknown, investors will likely remain skeptical until financial stocks become too good a bargain to pass up, as a definitive end to the matter is probably not in the cards anytime soon.

The other ETFs in the bottom 10 are an interesting mix. For example, the PowerShares High-Yield Equity Dividend Achievers Portfolio (AMEX: PEY) was down 8.73%; however, the financial sector accounted for 64.13% of the fund's holdings at the end of the third quarter. The Rydex S&P 600 SmallCap Pure Value ETF (AMEX: RZV) fell 9.49%. Another PowerShares Fund, the PowerShares Dynamic Retail Portfolio (AMEX: PMR) was down 9.95%. Interestingly, RZV's largest sector is Consumer Discretionary, which includes quite a few retail stocks; there is probably quite a bit of overlap between the holdings of PMR and RZV.

Written by Heather Bell

Comments

[ak]

Nice summary. Regarding Russia, isn't RSX a Russia ETF

[QuoVadis]

Russia, the fourth BRIC country, does have its own ETF. " RSX is the ticker for Market Vectors-Russia ETF. This ETF seeks to track, before fees and expenses, the DAXglobal Russia+ Index from Deutsche Bourse. The index represents 38 publicly traded Russian issuers and is designed to tract the price movements of securities of Russian companiees traded on global exchanges.