As I noted in this recent column, exchange-traded funds (ETFs) that focus on homebuilders, biotechs and banks have been among the top domestic performers of 2012. Considering "a body in motion tends to say in motion," some of these ETFs may well extend their gains into 2013.
Yet many investors are more inclined to focus on ETFs that lagged the market in 2012 to find upside. Dozens of ETFs rose only modestly, below the double-digit gains seen by the major averages. In fact, some of these funds fell in value, moving toward multi-year lows.
The biggest duds should come as no surprise: clean-energy stocks — especially solar — fell in 2011 and then tumbled sharply this year.
The Clean Energy Sell-off Continues
Tempted to bottom-fish? Don't bother. In the solar industry, we still need to see the final shakeout among the most financially-distressed firms until industry supply falls in line with demand. The demand picture for solar isn't quite as bad as you might think. In a number of countries such as India, Australia and even here in the United States, solar installations continue apace. That's why I remain a fan of First Solar (Nasdaq: FSLR), which I recently noted here.
Still, the ETFs noted above hold plenty of dead-man-walking solar business models, and are best avoided.
The same can be said for wind-power stocks. Key tax breaks for this industry may soon expire, pushing demand lower in 2013. Wind power would look a lot more appealing were it not for the fact that natural gas prices have come so far down from their 2008 peaks.
Beyond solar and wind, you'll note another group of energy-focused ETFs bringing up the rear in 2012. A pair of coal-focused ETFs has shed roughly 20% of their value thus far in 2012, though if Republican presidential candidate Mitt Romney wins the upcoming election and follows through on his commitment to provide coal-friendly government policies, then these laggards may come back into vogue.
But it's the Global X Uranium ETF (NYSE: URA) that deserves closer attention. Back in June, I took a fresh look at this ETF and the other uranium plays, and concluded that the long-term backdrop remains quite bright. In fact, that's a view shared by my colleague Nathan Slaughter, who has prepared this special infographic on the topic.
Lastly, it's important to take note of the Global X Gold Explorers ETF (Nasdaq: GLDX). As my colleagues and I have noted on several occasions recently, gold-mining stocks have taken it on the chin this year, due to rising mining costs. Yet these miners now look quite oversold — if you believe gold prices will at least remain stable in coming years. My colleague Bob Bogda recently touched upon the disconnect between gold prices and gold-mining stocks.
Risks to Consider: Many of these ETFs are focused on alternative energy and their future relevance may hinge, in part, on which candidate wins the coming presidential election.
Action to Take –> Most of these ETFs are facing headwinds that won't soon abate. Avoid clean-energy stocks in particular, until the forces of supply and demand come into better alignment. Yet for uranium, that's precisely the long-term backdrop that appears to be shaping up. Though uranium prices continue to hover near multi-year lows, thanks to the lingering effects of the 2011 crisis in Japan, a key supply of factor will dry up in 2013, which should set the stage for rising uranium prices.
— David Sterman