US'08 vs. EU'11 Sector Performance

by Jay Pestrichelli on December 22nd, 2011

Today, we'll use this page for the follow up information on our MarketWatch article, An Opportunity Trade in Europe. The link below provides the PDF detailing the performance for the US sector ETFs for '08, '09, and '11 comapred to the European sector performances for '11

One can argue that Europe feels like the US in 2008. Or at least part of it does. Comparing some of the sector ETF performances of the US in ’08 and Europe in 2011

Looks Familiar
Bracketing the best and worst performing sectors, there is some clear consistency in both time periods. The Financials are the worst performing sector and the Staples are the best. US’08 XLF was down 66% and the EU’11 EUFN is down 33%. Staples were the best of US’08 only down 18% and to date, EU’11 IPS is actually positive with a gain of 4%. Many other sectors performed comparably to the broad market index ETFs as well.

Wait…what?
There are a few differences between these two periods that fly in the face of typical investing practices. Take for example Real Estate. As expected, the US sector in ’08 was down 49%, more than 10% worse than the broad markets as represented by SPY. Compare this to IFEU that has stayed inline with the European benchmarks as represented by VGK, both being in the mid teens.

However, the big stand out is the Utilities. This year IPU, a proxy for International Utilities, is down 20% and underperformed the broader European market. Compare this to the XLU, a US utility ETF, which outperformed the S&P 500 SPY by 18% in 2008.

Historically, the utilities have been a safe haven when growth markets look challenged. This was the clear trade of 2011 in US with the XLU being the best performing sector ETF up 9% YTD.

Then what happened?
If we’re making the comparison of US’08 and EU’11, the question is what happened the next year for US’09. The rebound was monumental to say the least and we all know that story, but here’s a little reminder of these mentioned sectors. The SPY was up 31%, Financials rebounded with a 56% gain, Staples underperformed with a 22% uptick, and Utilities missed the mark with only a 6% gain.

Its worth noting that $100 invested for a 2 year period beginning in ’08 through ‘09 ended up being valued at $99 if it was in the Staples, $82 if it was in the Utilities $81 if it was in the S&P 500, and only $54 if it was in the Financials.

A Hedged Opportunity for 2012
Its tough to take any position in Europe at all these days. Actually, many money managers have gone through deliberate actions to avoid the continent altogether. However, if you build in protection, you can consider taking a shot at an unexpected underperformer like the Utilities or a sector that has shown the propensity to make a dramatic rebound like the Financials.

Admittedly, it will take a lot of soul searching to take a bullish position in the Financials regardless of being hedged or not, so look to the Utilities for an opportunity.


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