Worst to First: Financial, Materials ETFs Lead Market | ETF Trends

An analysis of exchange traded fund performance so far this year reveals that investors are piling into riskier sectors and moving away from conservative, dividend-paying ETFs that were the top performers in 2011.

Some experts think defensive plays like utilities and consumer staples have become expensive after an impressive run in 2011, reports Stuart Pfeifer for The Los Angeles Times.

“We think people are going to rotate out of some of those defensive names because the economy is starting to do better,” Brad Sorensen, director of market and sector analysis for Charles Schwab, told the LA Times. “Investors will be looking for a little more growth as the economy seems to be stabilizing and the employment rate improves.” [Investors Embrace Riskier Sectors]

In a major reversal from the dominant sector trends in 2011, ETFs that invest in financial and materials stocks are leading the pack so far this year.

Among the SPDR S&P Sector ETFs, financials and materials were the the dogs in 2011, losing 17.1% and 10.9%, respectively according to StockCharts.com. Banks and basic materials stocks were hammered by the debt crisis and concerns that Europe’s problems would chill the global economy.

However, Materials Select Sector SPDR (NYSEArca: XLB) is out in front in January with a 5.4% advance, trailed by Financials Select Sector SPDR (NYSEArca: XLF), which is up 3.8%. This outperformance suggests investors are becoming less fearful over Eurozone debt and a double-dip recession.

Guggenheim Securities analysts in a recent note said they see a “sustainable recovery” ahead for large-cap banks. Riskier bank stocks are the best performers in early 2012 “as it appears investor risk aversion has been abating,” they added. So far, earnings season for the major U.S. banks hasn’t revealed any nasty surprises. Catalysts for the sector in 2012 include an improving economy and the prospect of dividend hikes as banks continue to shore up their balance sheets in the wake of the financial crisis.

Conversely, last year’s highfliers are the worst performers this year: utilities, healthcare and consumer staples ETFs. [Investors Rotate Away from Utilities]