It’s been a tough week already on Wall Street: Tech stocks are slumping, energy shares are getting clobbered and phrases like “global depression” are popping up in the financial media. While it’s hard to put lipstick on Europe’s PIIGS countries, investors can’t exactly stash all their cash in low-yielding Treasuries without leaving money on the table.
Here’s one alternative: hot exchange-traded funds that have outperformed in the first half of the year — and appear to have legs to stand on for the second half of 2012.
One of the most valuable characteristics of ETFs — particularly given the current state of the market — is diversification. Investing in baskets of stocks (often tied to an index) is an easy way to gain exposure to a sector without going all-in on an individual equity. Because ETFs trade over an exchange like a stock, they offer greater liquidity than mutual funds — and usually with lower expenses.
But which ETFs make sense now? With the rebound in home building, buyout buzz in biotech and political change in Mexico, ETFs in these sectors already have been among the best-performing funds so far this year and, comparatively speaking, look to hold their own — at least in the short term.
U.S. home construction got encouraging news earlier this month when the U.S. Commerce Department reported that new housing starts rose nearly 7% in June over the prior month. The seasonally adjusted 760,000 new housing starts — the highest level since October 2008 — is a far cry from the 535,000 just one year ago.
If you’re looking to play the rise in new home construction, consider the iShares Dow Jones US Home Construction Index Fund (NYSE:ITB). ITB was launched in mid-2006 and has amassed roughly $800 million in assets. This year, ITB has surged with the optimism in housing, gaining 42% to date.
ITB’s top holdings include the usuals, such as D.R. Horton (NYSE:DHI), Lennar Corp. (NYSE:LEN) and Toll Brothers (NYSE:TOL), and it offers a decent expense ratio of 0.47%.
In the biotech sector, Big Pharma is on the buyout prowl, as InvestorPlace Editor Jeff Reeves explains here. In the wake of GlaxoSmithKline’s (NYSE:GSK) $3 billion buy of Human Genome Sciences (NASDAQ:HGSI) and Bristol-Myers Squibb’s (NYSE:BMY) $7 billion deal for Amylin Pharmaceuticals (NASDAQ:AMLN), the industry has been rife with speculation that more big deals will soon follow.
That’s why now would be a good time to check out the SPDR S&P Biotech ETF (NYSE:XBI). XBI, which has boomed by about 35% this year, has more than $700 million in assets and includes biotech firms such as Onyx Pharmaceuticals (NASDAQ:ONXX), Pharmacyclics (NASDAQ:PCYC) and Arena Pharmaceuticals (NASDAQ:ARNA). XBI charges 0.35% in expenses.
Emerging-market ETFs are another good way to go, but timing is everything.
The Market Vectors Egypt ETF (NYSE:EGPT) has returned 33% year-to-date, but frankly, I don’t think it’s a sure thing anymore. EGPT performance skyrocketed this year on hopes of an end to more than 17 months of turmoil that included the overthrow of President Hosni Mubarak and the election of President Mohamed Morsi, the U.S.-educated Muslim Brotherhood candidate.
But the transition has been rocky and the military still has the power to hold the president in check. Morsi’s appointment of the virtually unknown water and irrigation minister Hesham Kandil as prime minister on Tuesday quashed investors’ hopes for a strong prime minister with street cred as an economist. I’d pass on EGPT in the short run.
I prefer to play foreign presidential politics with the iShares MSCI Mexico Investable Market Index Fund (NYSE:EWW). Mexico President-elect Enrique Pena Nieto said on Monday that Mexico must boost trade with Asia — particularly China — as a safeguard from a slowdown in the U.S. economy.
With Brazilian stocks on the schneid this week because of the eurozone mess and falling oil prices, EWW is looking pretty good — and it doesn’t hurt that the ETF has seen a lot of economic ebbs and flows since its inception in 1996.
EWW is the biggest of these three funds, at more than $1 billion in assets, but it’s also the most expensive with a 0.52% expense ratio. Its year-to-date return of 15% doesn’t match up to ITB or XBI, but it’s still well more than double the gains of the broader markets.
Top holdings include America Movil (NYSE:AMX, nearly one-fourth of total holdings), beverage giant FEMSA (NYSE:KOF) and mining and exploration company Grupo Mexico (PINK:GMBXF). It also holds about 8% of scandal-plagued Wal-Mart de Mexico (PINK:WMMVY).
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.