From the July 2009 issue of Investment Advisor • Subscribe!

July 1, 2009

ETF Advisor: Cr?me de la Cr?me--The Best-Performing ETFs for the Long Run

Quick, what do these three exchange-traded funds--Consumer Staples Select Sector SPDR, iShares Dow Jones U.S. Energy Sector, and Vanguard Consumer Staples--have in common?

They are the only three equity ETFs that met the toughest possible screening parameters. All three have a five-year track record and also have positive total returns for the last five years, according to a screen of Standard & Poor's Equity Research's universe of ranked ETFs conducted on the last trading day of May 2009. All three have an expense ratio of less than 0.5%. Moreover, all three win an "overweight" recommendation from S&P's new qualitative and quantitative ETF assessment tool.

A quick word about S&P's methodology: instead of relying only on past performance and risk/return characteristics to generate a ranking, S&P also considers the outlook for the underlying holdings (stocks) within the ETF. Of course, S&P also weighs performance, costs, and risks. These three ETFs garner an "overweight" recommendation in all three, contributing to the overall "overweight" ranking.

Two of the three--the Consumer Staples Select Sector SPDR and the Vanguard Consumer Staples--are similar in that they both track the performance of the consumer staples sector of the economy. Consumer staples stocks make up 12.3% of the S&P 500 index.

A Good Sector

S&P Equity Strategist Alec Young believes the sector deserves a market weighting, meaning the U.S. equity portion of clients' portfolios should contain a 12.3% allocation to this sector. "We believe consumers are trading down to private label brands and that this is hurting demand for national branded products and crimping profit margins," says Young. "In addition, inventory de-stocking by retailers is a sales headwind. But offsetting these negatives are relatively attractive dividend yields, year-over-year commodity price declines, and the likelihood that demand for this sector's products will decline less than other, more cyclical sectors."

The S&P 500 Consumer Staples sector trades at 13.5 times estimated 2009 profits, a discount to the projected P/E of 16.4 for the broader market. The sector's P/E-to-projected five-year growth rate (PEG) ratio of 1.4 is below the broader market's 1.7.

The third "cr?me de la cr?me" ETF tracks the energy sector, which makes up 12.9% of the S&P 500 index. Again, Young recommends a market weighting to this sector.

"We believe the recent sharp decline in upstream capital spending should lead to longer-term supply constraints that we believe will boost oil prices over the longer term," says Young. However, some may view the sector as expensive. It trades at an estimated 2009 earnings multiple of 21.9, above that of the S&P 500. Its PEG ratio of 3.2 is also above the broader market's.

Good Year, Good Month

Meanwhile, ETFs continue to attract assets. In the most recent ETF Snapshot monthly report released June 10 by State Street Global Advisors, assets in the 728 U.S. ETFs for the year through May 31 were up 10%, to $587 billion, compared to 4% asset growth for the overall U.S. stock market. ETF assets were up by $56 billion, or 10.6%, in the month of May 2009 alone. State Street noted that in May, all categories gained assets, led by the international category, which accounted for $24 billion of the gain, or 43%.


S&P Managing Editor Beth Piskora can be reached at beth_piskora@standardandpoors.com.
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