The big success stories of 2011 should be well covered by now. McDonald’s (NYSE:MCD) was the best-performing Dow stock of 2011, and Bank of America (NYSE:BAC) was the worst performer in the index. Utilities and dividend stocks outperformed, as did that iconic growth stock Apple (NASDAQ:AAPL), while the biggest meltdowns came from financials and, of course, Netflix (NASDAQ:NFLX) after its Qwikster debacle.
But which picks are going to beat the market in 2012? And what are the emerging trends that still have momentum?
It’s hard to argue that slow-growth dividend payers like tobacco and utility stocks will keep up their outperformance. For instance, how does a company like Consolidated Edison (NYSE:ED) find growth if it’s a highly regulated regional utility? How does Philip Morris (NYSE:PM) get millions of new smokers amid super-high taxation and the obvious health problems associated with its products?
No, it’s unlikely that the biggest profit stories of 2011 will repeat in 2012. But some trends that have taken shape during the past 90 days indicate some interesting investments gaining momentum in the new year. And best of all, all of these sectors and investment classes can easily be played via exchange-traded funds.
Here are five market-trouncing ETFs with big 90-day returns that could tell the story of what’s working and what’s not in 2012:
Energy demand, while down thanks to the recession, has a built-in baseline. And when the economy does turn around eventually, energy stocks will benefit big-time — particularly small companies with a lot of room to grow.
That’s where the PowerShares S&P Small Cap Energy Fund (NASDAQ:PSCE) comes in. This ETF corresponds, generally, to the S&P SmallCap 600 Energy Index. Top holdings are Lufkin Industries (NASDAQ:LUFK), Seacor Holdings (NYSE:CKH) and Bristow Group (NYSE:BRS) — which admittedly make up about 30% of the entire portfolio, collectively, according to reporting this week.
The PowerShares S&P Small Cap Energy Fund has tallied 10% gains in the past 90 days, vs. about 6% for the S&P 500 Index. And if you look from the post-Thanksgiving lows, the PSCE fund has done even better, with about 20% returns.
Why the boom for small-cap energy stocks? Well, oil has once again reclaimed the $100 mark, and it appears that investment in the energy sector is gaining momentum. Small-cap stocks like Bristow and Seacor that provide services to offshore oil rigs have done quite nicely recently and might continue to outperform in 2012 — especially if Iran sanctions increase the demand for oil from other regions of the world, such as the Gulf Coast.
Don’t call it a comeback for housing just yet. The mortgage meltdown still is in full swing, with a backlog of foreclosures sitting on the books at major banks and persistently high unemployment preventing many consumers from feeling comfortable about a home purchase.
However, if you take a look at the iShares Dow Jones U.S. Home Construction ETF (NYSE:ITB), you might find a pretty good case that housing is at least near the bottom if it isn’t there yet — and that related companies are building a recovery.
Components of this fund include D.R. Horton (NYSE:DHI), Lennar (NYSE:LEN), PulteGroup (NYSE:PHM) and other big names in building. While many of the stocks in this exchange-traded fund remain a shadow of what they were in the boom times of 2005 and 2006, they have fared well in recent weeks.
The ITB fund is up a whopping 36% in the past 90 days — more than four times the S&P 500.
Financial stocks are dead money, right? Well the recent strength in Bank of America stock and others since the start of the new year should hint that might not be the case. Admittedly, earnings at banks still are bad, but there are signs of life — at least in regards to share prices.
If you are thinking of dipping your toe back into financials, consider that during the past three months the SPDR S&P Regional Banking ETF (NYSE:KRE) has outperformed major financials like BofA, JPMorgan Chase (NYSE:JPM) and Citigroup (NYSE:C). Dial back the performance to a full year and the results are even more dramatic, with the KRE regional bank ETF almost flat, while JPM is off 16%, Citi is down 36% and Bank of America is down 46%.
The difference is no mystery: size. The big boys leveraged up, took riskier bets and are connected to toxic eurozone debts. Local lenders — particularly in regions with relatively stable housing markets — have fared better. Top holdings are Regions Financial (NYSE:RF), which serves the South and Midwest; Puerto-Rico’s Popular (NASDAQ:BPOP) and East Coast-based SunTrust Banks (NYSE:STI).
The regional banking ETF is up 11% in the past 90 days.
Want to get into the commodity game but don’t know how to trade futures? Consider the iPath S&P GSCI Crude Oil Total Return Index ETN (NYSE:OIL). Just as the apt ticker suggests, this fund is one of the purest crude oil plays that investors can hope for.
Here’s how it works: OIL is an exchange-traded note — meaning it shares many traits with ETFs but does not deal not in hard equities. Instead, it reflects the returns made on investments in West Texas Intermediate (WTI) crude oil futures contracts, and rolls them forward each month — meaning the fund operators always sell the current month’s contract before it expires and buy into next month’s contract to avoid taking physical delivery of any commodities.
Hopefully the risks of this method — known as “contango” in futures lingo — are clear. If next month’s futures are selling for less than this month’s futures, the ETN still is going to sell out of the old contracts and buy new ones — even if it means recording a loss.
Bottom line: The actual change in the price of crude oil might differ slightly than the performance of this investment. All that said, it’s hard to argue with performance. In the past three months, OIL is up 10.3%.
Inverse VIX Futures
If you thought that last ETN was a doozy, next up is an even trickier investment. The iPath Inverse S&P 500 VIX Short-Term Futures Fund (NYSE:IVOP) is a mouthful, and is a mighty strange investment to boot. Here’s the most concise way I can explain it:
- The VIX is a measure of market volatility, the so-called “fear index.”
- Futures can be traded on the VIX — meaning you can bet on whether the index will be higher or lower at a set point in the future.
- There are short-term and long-term futures for the VIX, so you need to pick a time frame for your prediction, too.
- An “inverse” ETF is built to move opposite its benchmark. So an inverse Dow fund goes up when the Dow goes down, and down when the Dow goes up. An inverse VIX fund, then, does the same — delivering profits when the VIX falls, and losing you money when the VIX rises.
Put all this together, and you get a kinky investment that will deliver big returns when short-term market volatility is dropping. The result is an impressive three-month gain of almost 39% for the IVOP fund vs. just 6% for the S&P 500 — which stands to reason considering the October rally started some stability for the market and a subsequent drop in investor uncertainty.
Make sense? I hope so. If not? Don’t mess around with this fund. It’s obviously a complicated instrument for sophisticated investors.
Jeff Reeves is the editor of InvestorPlace.com. Write him at editor@investorplace??.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. Jeff Reeves holds a position in Alcoa, but no other publicly traded stocks.