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International stocks seen dragging down equity ETF results

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With major stock markets outside the US showing weak returns thus far in 2011, equity ETFs or ETNs have seen mixed results, with a majority of them in negative territory, according to Tom Graves (pictured) of S&P Capital IQ.

"Year to date, through 12 December, there were 128 ETFs/ETNs with a positive total return, including about 10 ETFs that were up more than 10%," says Graves. "In comparison, of the equity ETFs or ETNs that were available for the full period, we found 454 with a negative total return, of which 247 were down more than 10%."

The S&P 500 Index had a positive total return of 0.3% through 12 December, compared to a 6.2% negative return for the S&P Global 1200, which includes the S&P 500. Looking outside the US, areas with negative total returns include the Japanese S&P/TOPIX 150 (-18.6%) and the S&P Europe 350 (-10.5%).

“Viewed broadly, domestic US ETFs/ETNs fared somewhat better than those with more of an international or global emphasis,” says Graves. “Year-to-date, S&P Capital IQ’s MarketScope Advisor (MSA) database shows 113 domestic ETFs/ETNs with a positive total return, while 199 were in negative territory. In comparison, there were only five international or global ETFs/ETNS with a total return above 0%, while 245 had a negative return.

“In general, total returns should be helped by the inclusion of dividend income. However, the proportion of positive total returns among higher-yielding equity ETFs/ETNs was similar to that of the entire universe we reviewed. Among the 244 equity ETFs/ETNs with a 12-month yield of more than 2%, only about 18% of them had a positive total return.”

Among the year’s 10 top-performing ETFs, all of them were classified by S&P Capital IQ as sector ETFs, based on assets they held. This included three Utilities sector ETFs, three Consumer Staples, two Health Care, and two Consumer Discretionary. The largest of the top-performing ETFs (based on market capitalization), was Utilities Select Sector SPDR Fund (XLU 35 Overweight), at $4.6 billion, and the smallest was PowerShares Dynamic Retail Portfolio (PMR 22 Underweight), at $29 million. Five of the top-performing ETFs had a 12-month trailing yield of at least 2.3%, but three of them had a yield of less than 1%.

Based on S&P Capital IQ Equity Research’s proprietary ETF rankings, five of 2011’s top-performing equity ETFs XLU, iShares Dow Jones US Pharmaceuticals Index Fund (IHE 74 Overweight), PowerShares Dynamic Pharmaceuticals Portfolio (PJP 27 Overweight), Vanguard Consumer Staples Index Fund; ETF Shares (VDC 81 Overweight), and Consumer Staples Select Sector SPDR Fund (XLP 32 Overweight) currently are receiving an Overall Ranking of Overweight. Through December 12, these five ETFs had year-to-date positive total returns of between 10% and 16%.

S&P Capital IQ Equity Research’s ETF analytical product offers a quantitative ranking methodology that combines input from holdings-based analyses and multivariate analysis of the security, producing output grouped according to Performance Analytics, Risk Considerations and Cost Factors categories. The ETF analysis bubbles up to an Overall S&P ETF Ranking (Overweight, Marketweight, or Underweight) of an ETF security relative to all other equity ETFs on which we have an Overall Ranking.

Among the other year-to-date top-performing equity ETFs, S&P Capital IQ has an Overall Ranking of Marketweight on four of them, and an underweight appraisal on one.

“The Marketweights include Vanguard Utilities Index Fund; ETF Shares (VPU 74 Marketweight); iShares Dow Jones US Utilities Sector Index Fund (IDU 85 Marketweight); First Trust Consumer Staples AlphaDex Fund (FXG 24 Marketweight); and SPDR S&P Retail ETF (XRT 52 Marketweight),” says Graves. “Meanwhile, we found four ETFs with a year-to-date total return performance of worse than negative 50%,” says Graves. “This included Market Vectors Solar Energy ETF (KWT 4 Underweight), Guggenheim Solar ETF (TAN 3 Underweight), Global X Uranium ETF (URA 9 Not Ranked), and Market Vectors India Small-Cap Index ETF (SCIF 10 Marketweight). Each of these ETFs had a total return of between -50% and -63%.

“S&P’s Capital IQ MarketScope Advisor product can go far beyond identifying 2011’s top and worst year-to-date performers. Currently, we have 157 equity ETFs with an Overall Ranking of Overweight. This includes 127 that are classified as US ETFs, and 30 that are categorised as international or global. Also, 41% (64) of all the Overweights are considered to be sector ETFs. In terms of age, 121 of the Overweight-ranked ETFs were launched prior to 2010, and the remaining 36 were introduced since then.

“Sixteen of the ETFs receiving an Overall Ranking of Overweight had a 12-month yield of more than 3%, while 14 of them had a yield of less than 1%. Thirty-six of the Overweight-ranked ETFs also had an Overall ranking of Overweight in each of S&P three primary analytical categoriesPerformance Analytics, Risk Considerations and Cost Factors.

“In arriving at an Overall Ranking for equity ETFs, S&P Capital IQ’s utilises up to 10 analytical elements in the Performance Analytics, Risk Considerations and Cost Factors categories. This includes assessments of both an ETF’s holdings and of characteristics pertaining to the ETF security. Six of the 10 analytical metrics are proprietary to S&P.

“S&P’s 10 analytical elements for equity ETFs include three for Performance Analytics that are all proprietary to S&P, including S&P equity analyst STARS opinions on stocks of companies owned by ETFs. Overall, five of the 10 elements in S&P’s ETF ranking methodology are holdings-based, while the remaining five, including expense ratio, are tied to the ETF security itself.

“As with all investments, S&P Capital IQ Equity Research believes that investors should look to make selections that are suitable for their objectives and risk profiles. Also, S&P’s analytical inputs for assessing ETFs are constantly being updated,” says Graves.

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