Q1 In Review: Dogs Have Their Day

by on April 2, 2010 | ETFs Mentioned:

The first quarter of 2010 is officially in the books, with global equity markets calming after a rocky start to post impressive gains in March. Most ETFs finished the first quarter–a three month period many investors saw as a critical test of the recovery’s staying power–in positive territory. Of course some funds performed better than others, and a closer look at the top performers in Q1 reveals some interesting trends. Many of the big gainers year-to-date were the dogs of recent periods that were hit hardest when markets nosedived. While many of these ETFs have made big strides to reclaim ground lost during the most recent global recession, a number of them remain well below all-time highs.

Below, we highlight six of the best performers of the first quarter that were also among the biggest decliners during the recent downturn (for comparison purposes, the Vanguard Total Stock Market ETF (VTI), a broad-based domestic equity fund, finished the first quarter of 2010 up about 6.1%).


These Dogs Have Bite
9/1/2008 to 3/9/2009 -70.5% -60.6% n/a n/a -38.5% -63.8%
1/1/2010 to 3/31/2010 10.8% 13.0% 15.9% 15.8% 7.2% 9.9%

The financial sector was the epicenter of the meltdown that accelerated into a full-blown global crisis in 2008 and early 2009. But now profits at big banks have surged, reigniting the “Wall Street vs. Main Street” debate. And the likelihood of a comprehensive overhaul has diminished, as the Obama administration is running low on political capital following the passage of landmark health care reform.

The Financials Select Sector SPDR ETF (XLF) gained 10.8% in the first quarter of 2010, making it one of the best performing sector SPDRs.


The homebuilding industry was pushed to the brink of total collapse in recent years as the residential real estate market imploded, home values plummeted, and inventories shot up to record levels. The health of homebuilders is nowhere near its pre-recession level, but life has definitely been breathed back into this sector, as volatility has eased and expectations for a sustained recovery have increased.

The Dow Jones U.S. Home Construction Index Fund (ITB) added 13.0% in the first quarter of 2010. Although the fund has not come close to reclaiming pre-crisis levels, it has been one of the year’s best performers.


The airline industry has been battered and bruised in recent years, as a wave of bankruptcies and restructurings reshaped a once powerful sector. The Claymore/NYSE Arca Airline ETF (FAA) wasn’t around during all of the recent recession (it was launched in January 2009), but the underlying NYSE Arca Global Airline Index took a big hit as businesses slashed travel expenses and consumers reined in their personal budgets.

FAA has taken flight in 2010, adding 15.9% in the first quarter of the year as improved pricing power and and uptick in profitable business travel fueled a rebound.

Mortgage Finance

The SPDR KBW Mortgage Finance ETF (KME) tracks the KBW Mortgage Finance Index, a benchmark designed to track the performance of the U.S. mortgage finance industry, including pure mortgage players, mortgage insurers, and banks and thrifts that have considerable mortgage loan portfolios in the U.S. Major components of KME include New York Community Bancorp and Hudson City Bancorp.

KME was launched in April 2009, so this fund wasn’t around during the stretch of time that witnessed the implosion of the U.S. mortgage market. But it doesn’t take a finance whiz to guess the general direction of the fund’s underlying holdings during that period. So far, 2010 has been good to the mortgage industry, perhaps a byproduct of lessened fears over a double dip. KME finished the first quarter up 15.8%.


Japan was one of the few major global economies to miss out on the impressive rally that sent most markets materially higher in the final three quarters of the year. A stubbornly strong yen, mounting debt, and an ongoing battle with deflation have kept Japanese equities in check, threatening to create another “lost decade.”

But Japan has shown signs of strength in 2010, as the iShares MSCI Japan Index Fund (EWJ) rose by 7.2% in the first quarter. By comparison, EWJ gained just 3.2% in all of 2009.

Real Estate

For the last year, doom-and-gloom predictions of a collapse in the commercial real estate market have swirled around the investment community, with some anticipating a meltdown that would make the fall of the residential market look tame. But so far in 2010 real estate funds have shown surprising strength, becoming one of the best-performing asset classes.

The Vanguard Real Estate ETF (VNQ) gained almost 10% in the first quarter of 2010, clawing back a big portion of losses incurred in previous years.

Dogs Bite Back

The impressive rebounds from these ETFs illustrates a principle that has been hammered home to most investors; volatility is indeed a two-way street. Those punished most severely on the way down have become the biggest gainers on the way back up, and investors who stuck with these investments (or jumped in at the market bottom) have been handsomely rewarded.

It’s also worth noting that even after the big run-ups, many of these funds are well below pre-2008 levels, reason enough for some investors to let bets on these dogs ride.

Disclosure: No positions at time of writing.