Financials, Real Estate Challenge Tech for Sector Supremacy

A slew of new, trader-friendly sector funds have been launched this year and, as expected, those tracking technology indices seem to be attracting a big share of assets.

But surprisingly, financials and real estate have popped up as Old Economy forces among these new funds, indicating bullish sentiment among traders for those seemingly stodgy sectors.

Among the 15 iShares sector funds launched by Barclays Global Investors beginning last March, the U.S. Financial Sector index (IYF Quote) had attracted $110 million in assets through Monday, second only to $135 million invested in the U.S. Technology index (IYW Quote), according to Barclays. And the U.S. Financial Services (IYG Quote) index has drawn another $65 million, fourth-best among the iShares sector funds.

iShares Dow Jones U.S. Sector Indices
iShares Dow Jones U.S. Index	Assets	Date First Traded	Return
Technology	$135 million	May 19	19.4%
Financial Sector	110 million	March 31	11
Internet	75 million	May 19	14.5
Financial Services	65 million	June 21	15.2
Telecommunications	37 million	May 26	-7
Energy	32 million	June 16	4
Utilities	31 million	June 20	15.5
Industrial	28 million	July 14	3
Health Care	25 million	June 16	-0.2
Real Estate	23 million	June 19	5.4
Chemicals	18 million	July 28	6
Consumer Cyclical	15 million	June 28	1.8
Consumer Noncyclical	13 million	June 16	0.5
Total Market	10 million	June 16	3.7
Basic Materials	9 million	June 20	0.3
Source: Barclays Global Advisors, Baseline. Assets through Aug. 17. Returns through Aug. 23.

Barclays' 15 sector iShares, which track a variety of Dow Jones sector indices, are exchange-traded funds that are priced continually and are bought and sold throughout the trading day like stocks. (For more on iShares, see this recent Dear Dagen column.) They have attracted a total of $625 million in investment so far.

ProFunds, which launched a series of UltraSector funds in June, reports that the most popular are those tracking the Dow Jones financial and real estate indices. ProFunds Chairman Michael Sapir wouldn't reveal the asset levels of the individual funds, but says the total in all of the funds exceeds $100 million. Maxfunds.com, a Web site that tracks new funds, reports that the Real Estate UltraSector fund has drawn some $22 million of that total.

Like Barclays' iShares, ProFunds' UltraSector funds also are designed for frequent trading. ProFunds doesn't levy sales charges or transaction fees and doesn't limit exchanges between funds in the UltraSector series. The funds also are leveraged: They attempt to achieve a return equal to 150% of the gain of the underlying index. (That leverage also can work to magnify losses, as TSC recently reported.)

Because investors can jump in and out of these funds, timing plays a key role. And although financials and real estate are not historically as volatile as technology, they have been hot this year. Financial sector mutual funds have returned an average of 11.6% this year, compared with a 2.7% rise for the S&P 500 index, according to Lipper. Real estate sector funds are up 21.9%.

"I would think that [investors] are making a call on where they see value, and right now financial -- and more specifically financial industries -- are a good bet from a valuation perspective and a year-to-date performance perspective, too," says Andrew Arnott, general director of retail product management for John Hancock Funds.

"I think maybe one explanation might be the fact that for a month or two now, maybe people have felt the Fed is over with raising interest rates," adds Barclays spokesman Tom Taggart. Sectors are "gonna be in favor and out of favor, and it just depends on where we are," he says.

Meanwhile, Arnott says he is impressed with the level of assets the new funds have attracted. He said traditional funds are "really cracking down on market timing," so the new types of funds are attracting investors who want to buy and sell quickly.