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Precious-Metals ETFs Outshine Others

Except for a pair of commodity-related categories, all the equity groupings of exchange-traded funds lost ground during the first quarter of the year.

On the other hand, eight of the 10 fixed-income ETF classifications in the accompanying summary table of ETF investment objectives produced positive returns.

The only ETF investment objective to score a double-digit gain during the year's first quarter was precious metals. On the opposite end of the array, three equity categories -- financial services, health/biotechnology and global equity -- endured setbacks of more than 10%.

An exception to the success of the fixed-income group was the national municipal bond fund category. These funds slipped, on average, by 2.76% during the first three months of the year. The group was hurt by uncertainty as to whether bond insurance firms such as Ambac Financial (ABK) and MBIA (MBI) could maintain their triple-A credit ratings.

Keeping the national munis company as the only other fixed-income classification in negative territory for the three-month period was the high-yield corporate group. The downturn in the economy, along with the credit crunch, turned investors away from junk bonds and into more secure fixed-income instruments.

The weakening dollar propelled the global income group to the top of the heap among fixed-income ETF groupings.

Some surprises appear in the column of leading funds in the various ETF classifications in the adjoining table. While few are likely to be surprised by the strong performance of precious metals for the quarter, most wouldn't expect an ETF that invests in silver to lead the group. But with a return of 15.95% for the period, the iShares Silver Trust (SLV) ended the quarter in the front rank.

Similarly, most investors would have guessed that a fund with a focus on crude oil would have lead the energy/natural resources group, which edged out an average gain of 0.04% for the quarter. But it was the United States Natural Gas Fund (UNG) that proved the class of the field. It vaulted 33.79% during the year's first three months.

Among the 11 ETF groupings that lost ground during the quarter, seven were led by "inverse leveraged" funds that bucked the weakness of their respective categories. These funds, all from the "ProShares Ultra Short" family, move opposite the direction of the group average -- and at a magnified amplitude. The strongest of the seven was the ProShares Ultra Short Semiconductors ETF (SSG), which ballooned 34.77% during the period.

First-Quarter Summary of Exchange-Traded Fund Investment Objective Categories
Investment Objective Year-to-date average total return (%) Best performing ETF, ticker and ratings grade Year-to-date return (%) Dividend Yield (%) Total net assets ($ million)
Sector - Precious Metals 10.32 iShares Silver Trust (SLV) B- 15.95 N/A 3,383.1
Global Income 8.25 SPDR Lehman International Treasury Bond (BWX) U 8.25 2.49 180.7
Government Bond 3.55 iShares Lehman 7-10Yr Treasury Bond Fund (IEF) A 6.04 3.67 2,432.7
General Bd - Investment Grade 2.52 Vanguard Intermediate Term Bond ETF (BIV) U 3.68 3.90 N/A
General Mortgage 2.16 iShares Lehman MBS Fixed-Rate Bond (MBB) U 2.16 3.35 70.0
Corporate - Investment Grade 1.65 iShares Lehman 1-3 Year Credit Bond Fund (CSJ) A+ 2.64 3.16 110.2
Municipal - High Yield 0.81 PowerShares VRDO Tax-Free Weekly Port. (PVI) U 0.81 4.32 N/A
Municipal Single State 0.49 iShares S&P New York Municipal Bond (NYF) U 1.14 0.28 N/A
Emerging Market Income 0.32 iShares JPMorgan USD Emerging Mkts Bond (EMB) U 0.99 0.42 N/A
Sector - Energy/Natural Res 0.04 United States Natural Gas Fund (UNG) U 33.79 N/A 593.4
Municipal - National -2.76 SPDR Lehman Short Term Munil Bond (SHM) U 2.13 3.13 22.7
Corporate - High Yield -4.39 iShares iBoxx $ High Yield Corp. Bond (HYG) U -2.73 7.65 89.4
Growth & Income -5.25 iShares FTSE EPRA/NAREIT Europe Index (IFEU) U 7.10 0.17 N/A
Non-US Equity -5.70 ProShares UltraShort FTSE/Xinhua China 25 (FXP) U 21.55 0.16 365.2
Equity Income -6.26 ProShares Ultra Short Semiconductors (SSG) A 34.77 0.00 8.9
Growth - Domestic -7.88 ProShares Ultra Short Technology (REW) C- 33.51 0.21 16.4
Emerging Market Equity -7.96 ProShares UltraShort MSCI Emerging Mkts (EEV) U 12.92 0.23 76.8
Sector - Utilities -8.49 ProShares Ultra Short Utilities (SDP) C+ 21.15 0.56 11.5
Sector - Financial Services -10.45 ProShares Ultra Short Financials (SKF) C 17.97 0.00 970.2
Sector - Health/Biotechnology -10.76 ProShares Ultra Short Health Care (RXD) C 27.02 0.44 9.4
Global Equity -10.80 iShares S&P Global Materials Index Fund (MXI) B -2.19 0.64 312.1
Source: Ratings - Data as of 3/31/2007.

Richard Widows is a senior financial analyst for Ratings. Prior to joining, Widows was senior product manager for quantitative analytics at Thomson Financial. After receiving an M.B.A. from Santa Clara University in California, his career included development of investment information systems at data firms, including the Lipper division of Reuters. His international experience includes assignments in the U.K. and East Asia.

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