After a record-setting October gave investors hope that 2011 would finish on a strong note, the first couple weeks of November have effectively taken any wind out of those sails. The culprit - surprise, surprise - has been the cash-strapped PIIGS economies of Europe, with Italy now grabbing the spotlight as a serious credit risk and a grave threat not only to Europe but to global financial markets.
And just like that, it appears as if we are heading to a dismal end to a generally dismal year for many investors. The asset classes that had powered big recoveries in 2009 and 2010, such as commodities and emerging markets, have largely fallen flat this year. Most major benchmarks are in the red year-to-date, and it’s probably a safe bet that many investors have lost money this year.
There are, of course, a few bright spots: Certain asset classes always thrive in chaos and others manage to buck the trend. But so far in 2011, many of the ETFs that have squeezed out impressive gains have been anything but the usual suspects. Some unexpected securities have put up nice returns in a generally challenging environment.
|*As of 11/9/2011|
Official unemployment is currently hovering close to 9% and more accurate measures of joblessness are considerably higher. Consumers are generally pessimistic, and inflation has been tame for the last several years. Those factors would seemingly paint a tough picture for the retail sector, which relies on discretionary spending to generate earnings. But retail ETFs have actually performed quite well in 2011, building off a solid holiday season last year and continuing to climb higher. The coming weeks, of course, will be the crucial test for this sector. Strong sales could propel retail stocks higher while disappointing results would no doubt weigh on this sector:
- PowerShares Dynamic Retail Portfolio (NYSEARCA:PMR): This ETF, which includes a combination of brick-and-mortar retailers and online companies, is one of the funds in the suite of Intellidex funds from PowerShares. PMR is up 8% on the year.
- SPDR S&P Retail ETF (NYSEARCA:XRT): This ETF offers impressive depth and balance of exposure; XRT is linked to an equal-weighted index of retail companies. This ETF is up about 7% so far in 2011.
Emerging Markets Bonds
Just about every emerging stock market has been crushed in 2011 under the weight of inflationary pressures, slowing growth rates and general risk aversion. But bonds from the world’s developing economies have fared quite well so far as investors have embraced the yield potential of this asset class. Emerging markets bond ETFs offer yields that are considerably higher than comparable debt of U.S. issuers without a significant step up in risk factors:
- iShares JP Morgan Emerging Markets Bond Fund (EMB): This ETF includes exposure to debt of several emerging markets, including Brazil, Russia, Mexico, Turkey and the Philippines. EMB is up about 7.4% so far in 2011.
- PowerShares Emerging Markets Sovereign Debt Portfolio (PCY): This fund from PowerShares also offers investors access to dollar-denominated debt. PCY has climbed close to 9% so far this year.
It should be noted, however, that emerging markets bonds denominated in the local currencies have struggled in 2011, thanks to an appreciation in the greenback. The gap between ETFs that hold dollar-denominated emerging market bonds and products such as the WisdomTree Local Debt Fund (NYSEARCA:ELD), which invests in debt denominated in the local currency of issuers, is close to 600 basis points. That serves as an illustration of the significant impact that currency exposure can have on a portfolio.
Build America Bonds
Recent months have seen a number of widely-followed “experts” painting doom and gloom pictures for municipal bonds. But at least one corner of this market is alive and well. Build America bonds have thrived so far in 2011, thanks in part to reduced supply of these securities after the program was phased out.
Build America bonds are essentially debt issued by local governments with interest payments that are subsidized by the federal government. That combination results in lower borrowing costs for municipalities and attractive interest rates for investors. As the Build America Bonds program popped up, so too did multiple Build America Bond ETFs covering this corner of the market:
- PIMCO Build America Bond Strategy Fund (BABZ): This actively-managed ETF from PIMCO has given a nice boost to investors this year. BABZ is up about 22% on the year.
- PowerShares Build America Bond Portfolio (BAB): This ETF from PowerShares is passively indexed; it seeks to replicate the BofA Merrill Lynch Build America Bond Index. BAB has gained more than 20% on the year.
Real Estate ETFs
Real estate is generally seen as a risky asset class, and the performance during the recent financial crisis certainly indicates that that reputation is warranted. But many of the ETFs in the Real Estate ETFdb Category have done quite well in 2011, continuing to recoup the steep losses racked up in 2008:
- iShares FTSE NAREIT Residential Index Fund (REZ): This ETF is linked to the FTSE NAREIT All Residential Capped Index, a benchmark that includes companies that own and operate apartments, healthcare facilities, and self storage real estate. REZ is up about 8% so far in 2011.
- Vanguard Real Estate ETF (VNQ): This fund offers more broad-based exposure to REITs, including all corners of the domestic real estate market. VNQ, which charges just 0.12% in fees and can be traded commission free on TD Ameritrade and Vanguard platforms, has gained 3% this year.
Disclosure: No positions at time of writing.
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