The first quarter of 2012 is in the books, and it was a fruitful one. The S&P 500 gained 12% in the first three months of the year — its best first quarter in terms of points gained in its 55-year history.
Well, a rising tide lifts all boats, and ETFs were no exception. Read on and I’ll discuss the sector funds that truly outperformed this past quarter.
According to Yardeni Research, financials (up 21.5%) squeaked by information technology as the best-performing sector in the quarter by about 40 basis points. The third-best-performing sector was consumer discretionary stocks, at 15.5%. Pulling up the rear as the worst-performing sector in the quarter was utilities (-2.7%), the only sector out of 10 in negative territory.
My ETF highlights will come from the three winning sectors excluding any inverse or leveraged funds:
The most obvious selection here is the Select Sector Financial SPDR ETF (NYSE:XLF), up 21.5% in the first quarter. It’s by far the biggest ETF in the financial sector, with $7.6 billion in assets, and also the cheapest in terms of fees. The XLF took in almost $300 million in new money in the quarter, though its smaller sister fund — the SPDR S&P Bank ETF (NYSE:KBE) — was closer to $400 million in new money. So far in 2012, KBE is up 20.3%.
The best-performing financial fund in the quarter was the RevenueShares Financials Sector Index (NYSE:RWW), up 27.5%. It’s fundamentally weighted based on the same index as the XLF, determining holdings by revenue instead of market capitalization. The top holding of the XLF is Wells Fargo (NYSE:WFC) at 9.42%; in the RWW, it’s Berkshire Hathaway (NYSE:BRK.B) at 10.36%. With just $9 million in assets and relatively light volume, the RWW might be worrisome to some people. However, it’s my experience that fundamentally weighted funds do better than those using market capitalization over the long term.
At least 15 technology-related ETFs outperformed the Select Sector Technology SPDR (NYSE:XLK) in the first quarter, proving big does not always mean better. Up 18.51% for the first three months of the year, I’m sure those owning the fund aren’t complaining. However, the next two biggest tech funds in terms of assets both outperformed the XLK in the first quarter and have done so in the one-, three- and five-year returns as well.
The Vanguard Information Technology ETF (NYSE:VGT) has $2.5 billion in assets and an annual expense ratio of 0.19%, virtually identical to the XLK. VGT is up 20.87% year-to-date, and over the past five years is averaging 7.9% annually — 117 basis points higher than the XLK. Performing even better is the iShares Dow Jones US Technology Index Fund (NYSE:IYW), up 21.77% year-to-date and 8.13% annually over the past five years. While IYW’s management expense ratio is much higher at 0.47%, it’s a hard fund to ignore — especially when you consider all three funds have similar top 10 holdings, including large positions in first-quarter gem Apple (NASDAQ:AAPL).
Once again, the big boy on the block — Select Sector Consumer Discretionary SPDR (NYSE:XLY) — was lapped by the field in the first quarter. A total of 16 consumer discretionary funds have year-to-date returns higher than the XLY’s 15.56%.
At the very top of the list is the Global X Auto ETF (NYSE:VROM), up 25.92% year-to-date, with the First Trust NASDAQ Global Auto Index Fund (NASDAQ:CARZ) a close second at 22.37%. The auto industry definitely has seen a big resurgence in the past year — with Toyota (NYSE:TM) up 30% and Honda (NYSE:HMC) and General Motors (NYSE:GM) each up about 26% year-to-date — and both of these funds are benefiting from the continuing rebound in sales. We’ll see what their returns are like after the peak summer months and $5 gas, but for now, these are the big winners in consumer discretionary funds.
If you were backing consumer discretionary stocks in the first quarter, you were better to go outside the United States. The SPDR S&P International Consumer Discretionary Sector ETF (NYSE:IPD) gained 20.23% in the first quarter, 467 basis points better than the XLY. Not surprisingly, there are six car companies in the top 10 holdings of the IPD compared to just Ford (NYSE:F) in the XLY. This more than anything explains the huge gap in performance. Over a five-year period, the U.S. consumer discretionary fund has done 36% better.
For those interested in a global fund that very much includes the US, the iShares S&P Global Consumer Discretionary Sector Index Fund (NYSE:RXI), which replicates the performance of the S&P Global 1200 Consumer Discretionary Sector Index, is up 18.2% year-to-date. In the long term, it hasn’t done as well as the XLY, but better than the IPD. It’s a good balance of the two.
The top ETF performer in the first quarter was the Market Vectors India Small-Cap Index ETF (NYSE:SCIF), up 38.95%. And it seems like all but those invested in utilities or gold miners made off like bandits in the first three months of the year.
Count your blessings, because this might be the end of the good news in 2012.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.