S&P: Some ETF Investors Should Look at First-Half Laggards

The first half of 2012 is in the books and many ETF investors are looking at the winners from the first six months for help in finding winners for the back half of the year. That strategy might prove efficacious, but S&P Capital IQ recommends that investors evaluate some of the first half's ETF laggards as well. In a recent research note, the firm put Underweight ratings on two of the best-performing funds from the January-June time period while giving Overweight ratings to two first-half ETF laggards. Among those funds earning an Underweight rating is the Guggenheim Solar ETF TAN. TAN does not fall into the category of leader with the potential to turn into a laggard. Amid slack demand, falling prices and the loss of European subsidies, solar stocks have been among the worst performers this year. Not surprisingly, TAN is one of the worst-performing sector ETFs with a loss of 24 percent. Disappointment has not been the name of the game for the iShares Dow Jones US Home Construction Index Fun ITB, which was the top-performing non-leveraged ETF in the first half of the year. Still, S&P has an Underweight rating on the fund. "While mostly focused on homebuilding stocks, this 27-stock portfolio also has exposure to building products and home improvement retailers," S&P said in the note. "Many of these positions are considered overvalued according to both S&P Capital IQ equity analysts and S&P Fair Value, including Home Depot HD, PulteGroup PHM and Ryland Group RYL Despite its bullish technical input, ITB also incurs an above-average standard deviation, hurting its overall ETF ranking." S&P has Sell ratings on all three of those stocks. A surprise addition to list of potential leaders-turned-laggards is the First Trust NYSE Arca Biotech Index Fund FBT. FBT has been the leader among biotech ETFs in 2012, S&P prefers the SPDR S&P Biotech ETF XBI. S&P rates XBI Overweight. "While each has a favorable technical input, we rank FBT much lower than XBI because it is more expensive (0.61% gross expense ratio vs. 0.35%), incurs a higher standard deviation (29 vs. 22) and has a greater concentration in stocks with below-average S&P Quality Rankings such as Affymetrix AFFX," S&P said. The firm has a Sell rating on Affymetrix. One fund that did perform well in the first half that S&P rates Overweight is the PowerShares KBW Bank Portfolio KBWB. Wells Fargo WFC, Bank of America BAC, US Bancorp USB and JPMorgan Chase JPM and Citigroup C combine for about 38 percent of KBWB's weight. The ETF outpaced the rival Financial Select Sector SPDR XLF by a wide margin in the first six months of the year. S&P also likes two energy sector ETFs that slumped in the first half, the iShares S&P Global Energy ETF IXC and the Market Vectors Oil Services ETF OIH. Energy stocks were the worst performers in the S&P 500 in the first half and those glum returns now have the sector looking cheap by some metrics. IXC, which has over $1 billion in assets under management and an expense ratio of 0.48 percent, holds 92 stocks. Exxon Mobil XOM and Schlumberger SLB combine for over 19 percent of IXC's weight and both are rated Strong Buy by S&P. Schlumberger accounts for over 20 percent of OIH's weight. For more on first-half ETF winners, click here.