With less than a month left in 2011, the best performers in sector exchange traded funds this year track industries known for dividends and some insulation from economic cycles. They include ETFs tracking utilities, pharmaceuticals and biotechnology, and consumer staples.
Utilities Select Sector SPDR Fund (NYSEArca: XLU) is up 14.2% year to date while the S&P 500 has gained 0.9%, according to Morningstar. The fund has a dividend yield of 4.2%.
Other ETF options for the sector include Vanguard Utility Sector ETF (NYSEArca: VPU) and iShares Dow Jones U.S. Utilities Index (NYSEArca: IDU). [Consumer Staples, Utilities ETFs Reward Defensive Investors]
Studies show that dividends make up a big percentage of total stock returns, and that buying companies with solid and stable dividends can make a difference in overall returns over time, reports Ryan C. Fuhrmann for Financial Edge. However, a good indication of dividend power is not always the higher dividend yield, but rather the quality of the company. [Sector ETF Performance in 2011]
The Wall Street Journal warns that investors need to factor in dividends when looking at total ETF returns. Price charts alone can be misleading, the newspaper said.
“Looking solely at prices, you’d be left believing small-capitalization stocks vastly outperformed more “sluggish” utilities. Data from FactSet Research Systems show that in the decade through Nov. 30, the iShares Russell 2000 Index exchange-traded fund, which tracks the shares of smaller companies, zipped up 61%, versus a more modest 29% gain for the Utilities Select Sector SPDR,” WSJ reported. “But that woefully misrepresents the returns of these two investments. When dividends are included, the utilities ETF returned 84% to investors over the same period versus 81% for the small-stock ETF. What’s more, over the period, the value of the Utilities Select Sector fund gyrated much less violently than that of the iShares Russell 2000.”
Another corner of the market that has rallied in 2011 is the biotech/pharmaceutical sector. The iShares Nasdaq Biotechnology (NasdaqGM: IBB) is up 14% over the past 12 months. Gilead Sciences (Nasdaq: GILD) paid $11 billion for the hepatitis C drugmaker Pharmasset Inc. (VRUS), and the deal lifted the biotech ETF.
Consumer staples sector ETFs have also had a fair run in 2011 with investors favoring defensive sectors. Not only do these stocks offer some yield, they play defense well. SPDR Consumer Staples Select Sector Fund (NYSEArca: XLP) has gained about 16% over the past 12 months.
“Nevertheless, the three primary non-cyclical stock ETFs –healthcare, utilities, staples–have all become even stronger in these past 12 weeks. This suggests that non-cyclicals are performing as well as they ever have in terms of momentum. Equally compelling, they may be less affected by systemic shocks and uncertainties,” Gary Gordon wrote for Seeking Alpha.
Utilities Select Sector SPDR Fund
Tisha Guerrero contributed to this article.