The old adage “everything old is new again” often applies to financial markets. In fact, the cyclical nature of boom-to-bust economic cycles and the winners and losers they generate has become nearly as regular as the tides.
Through the first seven months of 2010, it’s certainly been a case of everything old is new again for sector ETFs. Remember the Internet boom? How about the real estate boom? Or for those who remember real far back, how about the biotech boom?
Well, all three of those market segments are booming year to date. In fact, these three former star segments have burned bright this year, and they make up the current list of the top five (non-leveraged, non-country specific) sector ETFs so far in 2010. Let’s take a closer look at each.
1) B2B Internet HOLDRs (NYSE: BHH). Business-to-business Internet commerce was the darling sector for much of the late 1990s, but in 2010 that sector is once again red hot. The Merrill Lynch B2B Internet HOLDRs are up 35.57% year to date (as of 8/6/10), but that’s largely due to strong gains in its main holding, e-business software maker Ariba (NASDAQ: ARBA). In an example of a very specific ETF, BHH has 88% of its assets allocated to Ariba. That’s great as long as this stock remains hot, but dangerous if it falters. The only other holding in BHH is a 12% allocation to holding company Internet Capital Group (NASDAQ: ICGE). You aren’t getting much diversification with BHH, but considering it tops our list of best-performing sector ETFs, this fund has certainly been the place to be in 2010.
2) Internet Infrastructure HOLDRs (NYSE: IIH). Coming in second on our top-five list is an ETF providing a little broader exposure to Internet stocks. It’s the Internet Infrastructure HOLDRs, and the fund is up 25.29% year to date. Top holdings in IIH are encryption and identity verification software maker VeriSign, Inc. (NASDAQ: VRSN) (a 51.52% allocation as of 12/31/09), Web application maker Akamai Technologies (NASDAQ: AKAM), (23.03%) and enterprise content management software firm Open Text Corp. (NASDAQ: OTEX), (12.42%). The gains in these stocks prove that the Internet infrastructure sector is no fluke. It also shows that there are still plenty of profits to be made in these Web-centric stocks.
3) iShares FTSE NAREIT Residential Plus Capped Index (NYSE: REZ). Remember when real estate stocks led the market higher? Actually, you don’t have to remember because real estate investment trusts, or REITs, have been outstanding movers so far in 2010. REZ is up 19.21% year to date, proving that this part of the real estate market is in anything but a slump. With REZ investors get exposure to a variety of income-generating properties including residential apartments, health care facilities and self storage centers. The top three holdings in REZ are Equity Residential (NYSE: EQR), (11.23%), Public Storage (NYSE: PSA), (10.95%) and HCP Inc. (NYSE: HCP), (8.85%).
4) First Trust NYSE Arca Biotech Index (NYSE: FBT). Another former darling sector of Wall Street that’s returned to its old form in 2010 is biotech. In fact, the gains in FBT of 18.07% year to date make it the fourth best sector performer so far this year. FBT contains some of the biggest companies in the biotech space, including Genzyme Corp. (NASDAQ: GENZ), Nektar Therapeutics (NASDAQ: NKTR) and Dendreon Corp. (NASDAQ: DNDN). Many of these biotech firms have posted stronger-than-expected earnings in 2010, and that’s propelled their share prices higher. Interestingly, the 2010 gains came despite the uncertainty in the space over health care reform legislation.
5) iShares Cohen & Steers Realty Majors (NYSE: ICF). The final ETF on the list of top five sectors funds so far in 2010 is once again real estate focused. ICF, which is up 16.74% year to date, contains many of the same REITs that REZ holds, including Public Storage (NYSE: PSA) and HCP Inc. (NYSE: HCP). ICF’s top holding is Simon Property Group (NYSE: SPG), (8.09%), one of the perennial powerhouse REITs. In fact, Simon recently reported a 56% year-over- year, second-quarter earnings increase on improved occupancy and increased property sales. So, while the real estate market at large may still be struggling, well-managed REITs like the kind held in ICF continue performing well.
Indeed, 2010 has been a case of “everything old is new again,” with many of past winning sectors achieving top-performer status in 2010. The question now is will the bulls continue running in the direction of these five ETFs, or are we in for an about face as the year unfolds? As that other old adage goes, “only time will tell.”
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