As the first-quarter earnings season continues to heat up, more casualties are likely. Some sectors of the market are better positioned than others to survive, but here are three sector-focused ETFs currently in the line of fire.
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A Shaky Foundation
Real estate has been a focus of the economic storm for some time. It comes as little surprise that the SPDR Dow Jones Wilshire REIT ETF (NYSE:RWR) now sits 55.8% below its trading price a year ago. This ETF holds 80 stocks and has exposure to commercial, residential and healthcare REITs.
Simon Property Group (NYSE:SPG), which accounts for 8.4% of the fund's net assets and is its largest component, has said it has been compelled to significantly cut back its development spending. However, the company's 2008 funds from operations (FFO) actually increased 8.8% on a per-share basis when compared to 2007.
Pressure on occupancy rates and earnings are still likely to plague many names in this fund. Dividend cuts and forecast revisions could also be forthcoming. This earnings season should tell us how much rebuilding lies ahead for this ETF. (For more, see The Risks Of Real Estate Sector Funds.)
Under the Knife
Conventional wisdom tells us the iShares Dow Jones U.S. Healthcare Provider Fund (NYSE:IHF) is positioned in a recession-proof sector. Unfortunately for investors in IHF and its holdings, the sector has been met with headwinds from the new administration. Earlier this year, President Obama revealed plans to overhaul the healthcare system by proposing new taxes and a competitive bidding process for insurers who sell private Medicare plans.
The plan aims to save the government $175 billion over 10 years. IHF dropped sharply in the days following this plan's unveiling, although the ETF has battled back to the tune of 25.9% since its close on March 9. This week, UnitedHealth Group (NYSE:UNH) and WellPoint (NYSE:WLP) both topped analyst expectations but noted weakness in enrollment in their commercial business segments. These two insurers account for approximately one-fifth of IHF's net assets. (For further reading, see Investing In The Healthcare Sector.)
Seeing Red
March was unkind to retailers as sales dipped by 1.1%, according to Commerce Department figures. This was the steepest decline in three months. This drop was unexpected, and should the trend continue, it will put a strain on ETFs with exposure to the sector such as the SPDR S&P Retail ETF (NYSE:XRT).
XRT is up 27.6% year-to-date. This run has been welcomed by investors in this fund who choked on a 38.8% loss last year. Many retailers have traditionally reported their results later in the earnings season, so retail investors should watch during upcoming weeks for signals of which direction this sector is headed. (For more, see Analyzing Retail Stocks.)
The Bottom Line
As what is sure to be a captivating earnings season kicks into full swing, a few sectors face greater headwinds than others. Some of the adversity is already priced into these ETFs. But by the conclusion of this earnings season, we should have a clearer picture of whether these three funds are in the clear or remain in the line of fire.
