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ETF News And Commentary

In the current uncertain economic environment with ultra low interest rates, investors have been starved for income in 2012. Investors in search of a decent level of current income have shifted their focus to ETFs with high dividend yields. ETFs with high dividend yields experienced heavy inflows during the fiscal year 2012 (Emerging Market ETFs: EEM vs. VWO).

Additionally, emerging market became the focus for investment as many looked to add some growth to their portfolio by investing overseas. Investors found investment in emerging market to be more lucrative compared to domestic plays, as many emerging market ETFs saw outsized returns in 2012.

But in 2013, apart from investing in bonds, high dividend yield ETFs and emerging market ETFs, investors should also consider investing in some of the sector ETFs highlighted below which are seeing favorable Zacks ETF ranks and strong momentum, especially as the U.S. economy continues to slowly recover:

Biotech Sector

With uncertainty in the economic environment, investment in Biotech ETFs makes sense as this sector is less impervious to broader economic conditions. The sector was one of the best performers of 2012, and it could continue into 2013 should M&A activity pick up (Top 3 Best Performing Healthcare ETFs).

With five options in the ETF space towards exposure in the biotech sector, investors have a few choices in the space. One of our top ranked products in the space is the First Trust Amex Biotechnology Index Fund (FBT - ETF report). FBT has delivered a robust 40.5% return to investors over a period of one year and could continue to outperform if current conditions hold (Top Ranked Biotech ETF: FBT)

The product is home to 20 biotech companies and has its assets invested across all classes of the market spectrum. A look at the style pattern reveals that the fund has a preference for growth stocks.

This also implies that the fund prioritizes securities on the basis of earnings growth and tends to have little inclination for undervalued stocks or securities which trade below their intrinsic value. Due in part to this, we have assigned the fund a ‘high’ risk rating, as the standard deviation on this product could be rather high.

Still, biotech stocks seem well positioned in this type of market environment and we believe that FBT could be a solid choice for investors going into 2013. This is evidenced by our Zacks ETF Rank of 1 or Strong Buy for the ETF.

Homebuilder ETF

Homebuilder ETFs were also one of the best performers in 2012. The housing market is benefiting from an increase in employment rates, higher consumer confidence and several years of pent-up demand.

Homes are now seen as a better opportunity now thanks to a stabilization of home prices, low rates on mortgages, and overbought conditions in many other investment avenues (Best Construction ETF to Ride the Housing Upswing).

With the Fed expected to keep interest rates low, the sector could continue to perform better going into 2013, especially if housing starts continue to trend higher. However, builders remain a bit cautious given some fundamental challenges, which includes a still fragile economy, obstacles related to project funding and fewer buyers qualifying for mortgage funding.

Despite these risks, an ETF targeting the space could still make for an interesting play. The iShares Dow Jones U.S. Home Construction Index Fund (ITB - ETF report) has been the best performing ETF in 2012, delivering a return of a whopping 78.9% over a period of one year. With housing numbers expected to improve, this ETF could continue to provide outsized returns to the investor (Is XHB a Better Housing ETF Play?).

ITB is home to 29 securities in which it invests an asset base of $1.7 billion. The fund does not appear to be spread across all securities as the top ten holdings take away 62.8% of the asset base. The fund charges a fee of 47 basis points from investors on an annual basis.

Lennar Corp and Pulte group, both of which reported solid gains in the recent quarter, occupy the top two positions in the fund. Investment in home construction industry is the top priority and focus of the ETF, unlike its (XHB - ETF report) counterpart which is much more spread out.

Currently, we have a Zacks ETF Rank of 1 or ‘Strong Buy’ assigned to the fund along with a medium risk rating. This means that we look for some more outperformance for the fund, but it could be a somewhat volatile ride.

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