With the SPDR S&P 500 (NYSEARCA:SPY) up 15.8 percent year-to-date, now is the time to drill down on what sectors have been driving the broader market’s bullish ways and what industry groups have been laggards. It is possible that some old laggards will become new leaders while it is also possible that this year’s outperformers will continue to deliver alpha next year.
There is something else to note about sector ETFs. With bond, dividend and emerging markets ETFs among the leaders in terms of 2012 inflows, many sector funds are suddenly starved for attention.
Take those ETFs that are not heavily exposed to major bank stocks or Apple Inc. (NASDAQ:AAPL) out of the equation, and it is fair to say that, while not forgotten, some focus has shifted away from sector ETFs in recent months. That does not mean investors will face a dearth of opportunities at the sector level in 2013. Actually, the scenario is just the opposite and the following ETFs could be in focus throughout the new year.
First Trust NYSE Arca Biotchnlgy Indx Fd (NYSEARCA:FBT) Barring an alarming reversal of fortune, the First Trust NYSE Arca Biotech Index Fund appears poised to end 2012 as the best-performing major biotech ETF. Assuming no significant change in the landscape, FBT could end the year with ahead of the SPDR S&P Biotech (NYSEARCA:XBI) by over 600 basis points.
However, past performance is no guarantee of future returns. That is worth noting, but it should be remembered that First Trust NYSE Arca Biotchnlgy Indx Fd (NYSEARCA:FBT), SPDR S&P Biotech (NYSEARCA:XBI) and the iShares NASDAQ Biotechnology Index (NASDAQ:IBB) offer investors something many other sector funds do not: Immunity. Immunity from the trials and tribulations of Europe’s debt crisis. Immunity from slowing emerging markets growth. And some immunity from domestic political wranglings.
The question marks facing biotech ETFs heading into 2013 are what will the new drug approval environment look like and whether or not mergers and acquisitions will pick up.
Market Vectors-Coal (NYSEARCA:KOL) Forgive the puns, which are somewhat appropriate when discussing coal, but it would take a Christmas miracle for Market Vectors-Coal (NYSEARCA:KOL) to finish the year in the green. That is even with the benefit of an almost 9.5 percent gain in the past month.
Year-to-date, Market Vectors-Coal (NYSEARCA:KOL) is off 21.1 percent, but the ETF and its constituents got some good news Tuesday when the International Energy Agency said coal will rival oil as the world’s top fuel source by 2017. In other words, that means investing in a high-beta, low-dividend sector for the long-term, a proposition that is undoubtedly unappealing to conservative investors.
Is increased coal demand a possibility? Yes. Can Market Vectors-Coal (NYSEARCA:KOL) perform better next year than it did this year? Well, it cannot do much worse. The other “yes” that needs to be factored into the equation is yes, natural gas prices are still low. The chart of the United States Natural Gas Fund, LP (NYSEARCA:UNG) says as much. That puts pressure on Market Vectors-Coal (NYSEARCA:KOL)’s components to produce and sell more metallurgical coal for steel production in emerging markets. Translation: Market Vectors-Coal (NYSEARCA:KOL) can move higher if the Chinese and Indian economies support that move.