6 ETFs That Led The Stock Market In January
Posted 02/01/2013 08:05 AM ET
The New Year ushered in a new crop of stock market leaders. Here's a look at six nonleveraged ETFs that outperformed the stock market the most in January.
What they all seem to have in common is that they lagged the market in 2011, followed by mixed returns last year. So they could be catch-up or reversion-to-the-mean plays, in which stocks that snoozed as the market leapt eventually join the leaders. Sector and country rotation occurs as successful investors sell their winners on the belief that they're overvalued and buy undervalued losers.
Victory In Vietnam
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Market Vectors Vietnam ETF (VNM) vaulted 19% in January. IShares MSCI Emerging Markets Index (EEM) ticked down 0.3%. The No. 1 performing ETF of the month has rallied 36% in the past year vs. 8% for EEM.
Vietnam staged a turnaround after crashing 44% in 2011. The economy slowed that year while inflation spiked 23% and the trade deficit widened, Neena Mishra, ETF research director at Zacks Investment Research wrote in a commentary.
"As a result, the government passed a resolution to restrain credit growth and control inflation and the central bank raised rates," Mishra wrote.
She continued: "Vietnam is expected to grow by almost 6% over the next 25 years and per capital income is expected to grow by more than six times over the same period. Vietnam continues to be the main beneficiary of the migration of low-end manufacturing out of China as the producers try to take advantage of wages that are about half of that in China. The shift in China's policy to focus more on domestic consumption will also benefit Vietnam as an outsourcing center.
"We may add that Vietnam now faces strong competition from neighbors like Bangladesh, Myanmar and Cambodia in low-cost manufacturing. However, in recent years the country has been somewhat successful in moving up the value chain by starting manufacture of higher-value products, in addition to its traditional export items of clothing and footwear.
"The economy still suffers from some structural problems like inefficient and wasteful public enterprises (which account for about 40% of output), an undercapitalized banking sector and a high trade deficit."
VNM sports the highest IBD Relative Strength Rating and IBD Accumulation/Distribution Ratings combination of 89 and A+. It has outpaced nearly 90% of the market the past 12 months and institutional investors are overwhelming sellers.
Solar Energy Shines
Guggenheim Solar (TAN) and Market Vectors Solar Energy ETF (KWT) heated up nearly 16% for the month vs. 5% for SPDR S&P 500 Index ETF (SPY). TAN and KWT have rocketed 35% the past three months vs. 7% for the SPY.
The solar industry's fortunes may be turning for the better after severely lagging the market the past four years because of over production in China coupled with cuts in crucial government subsidies in Europe and the U.S.
TAN and KWT crashed 29% in 2010, 64% in 2011 and 33% in 2012.
"2013 will mark a major shift for the solar industry as industry participants shrink, minimizing supply and pricing issues, and as geographic distribution improves," Todd Rosenbluth, an ETF analyst at S&P Capital IQ, said in an email. "We see this combination allowing for better fundamentals and prospects for survivors in 2014."
Most solar stocks are trading deep below book value, he adds. His top picks are Advanced Energy (AEIS), SunPower (SPWR) and Trina Solar (TSL). Each are weighted about 5% in TAN.
TAN's top three holdings are Hong Kong-based GCL-Poly Energy Holdings, weighted 12%; First Solar (FSLR) 8%; and MEMC Electronic Materials (WFR) 6%.
Brokers Break Out
IShares Dow Jones U.S. Broker-Dealers (IAI) notched a 13% gain in January. It's on the mend after lagging the stock market with a 27% nosedive in 2011 while the market gained 2%. It performed on par with the market last year. It started dominating three months ago, rising 22% vs. 7% for the SPY.
Wall Street powerhouses, Goldman Sachs (GS), Morgan Stanley (MS), NYSE Euronext (NYX), Charles Schwab (SCHW) and CME Group (CME) hold the heaviest weightings in the portfolio. They rose 7% to 20% in January.
Credit Suisse has an outperform rating on Goldman, Morgan Stanley and CME. It's neutral on NYSE and has no rating for Schwab.
IAI wins big and losses big in comparison to the market and is only appropriate as a small holding, says Timothy Strauts, an analyst at Morningstar.
He wrote in a report about the ETF: "While trading volumes help many of the firms in this portfolio generate transactional revenue, many of the firms in this ETF's portfolio also rely heavily on fees tied to assets under management. Thus, in rising markets, asset-based revenues tend to bolster performance. However, the significant operating leverage inherent with this type of business model cuts both ways.
"Profitability can get crushed during periods of declining revenues thanks to these firms' high level of fixed costs (that is, employee compensation and rent). Of course, the opposite is true during periods of strong market performance."
Oil And Gas Rev Up
Market Vectors Oil Services ETF (OIH) spouted 13% in January. It's gained only 5% the past 12 months, lagging SPY by nearly 11 percentage points. But it leads in the short term, rising 12% vs. 7% for SPY the past three months.
S&P Capital IQ rates the industry neutral over the next 12 months.
"While we still view the longer-term growth rate in upstream capital spending as a (long-term) positive, we harbor some concerns about near-term weakness outside of deepwater work," Rosenbluth wrote. "Our concerns stem in part from weakening global demand, even in emerging markets such as China; rising non-OPEC (Organization of Petroleum Exporting Countries) supply; and greater influence of the onshore U.S. market, where we see oil services demand as more volatile and beset by pressures from oversupply.
"On the other hand, the expected influx of new deepwater rigs through 2014 should spur demand for related services, and deepwater work typically carries higher margins."
IShares Dow Jones U.S. Home Construction (ITB) stair-stepped up 11% in January. It developed an astonishing 77% return the past 12 months and 16% the past three months. It tumbled 9% in 2011 while SPY added 2%.
S&P Capital IQ forecasts housing starts to increase 27.1% to 991,500 in 2013, with multifamily developments outpacing single-family. But it has a negative outlook on homebuilders over next 12 months.
"We believe most publicly traded builders are in a stable competitive position after cutting costs, retiring debt and growing cash positions," Rosenbluth wrote. "However, we expect increased foreclosure activity in 2013 to pressure home prices and stall improvement in new single-family home sales.
"The housing market will improve over the next year, but be shy of consensus views for stronger growth. It will take time before buyers' confidence and the job market to improve enough to support a more favorable view of home ownership."
Housing starts are less than halfway to recovering their 30-year high of 2.07 million in 2005. They averaged 1.74 million a year from 2000 through 2004.
Here's a look at major housing data:
• December housing starts: Up 12% over November and up 37% year over year to a seasonally adjusted annual rate of 954,000.
• December single-family starts: Up 8.1% in December, with year-over-year growth of 18.5%.
• Full-year 2012 housing starts: Up 27.4%, to 780,000 (from 612,100 in 2011).
• December housing permits: Up 27.3% year-over-year for single-family homes. Up 35% for multi-family units, suggesting ongoing strength in rentals.
Follow Trang Ho on Twitter @TrangHoETFs.
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