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Big Things from Small-Value ETFs

Technology and communications keep getting pounded in 2002.

Karen Wallace, 04/17/2002

<P>The best-performing exchange-traded funds (ETFs) of the year so far have focused on underpriced, small-cap stocks and real-estate securities. </P> <P>Meanwhile, the worst of these funds that can be bought and sold like a stock on an exchange have devoted significant amounts of their portfolios to technology stocks. For these laggards heavily weighted in telecommunications and networking stocks it seems like the capital spending drought in corporate technology and telecommunications will never end.</P> <P> <TABLE cellSpacing="0" cellPadding="0" border="0" > <TR bgColor="#999999" > <TD vAlign="top" align="left" colSpan=3 height="1"1><FONT face="Trebuchet MS" color="#ffffff" size="-2" ><B> This Year's Best-Performing ETFs</B></FONT></TD> </TD> <TD><IMG height="1" src="http://im.morningstar.com/im/dot_clear.gif" width=118></TD> <TD><IMG height="1" src="http://im.morningstar.com/im/dot_clear.gif" width=72></TD> <P><FONT face="Trebuchet MS" color=#999999 size="-2" ><B>Morningstar<BR>Category</B></FONT></P></TD> <TD align=right><FONT face="Trebuchet MS" color=#999999 size="-2" ><B>YTD Return<BR>( % )</B></FONT></TD> <FONT face="Trebuchet MS" color=#0 size="-2" >Small Value</FONT></TD> <TD align=right><FONT face="Trebuchet MS" color=#0 size=-1><FONT size="-2" >14.54</FONT></FONT></TD> <IMG height=3 src="http://im.morningstar.com/im/dot_clear.gif" width=422></TD> <FONT face="Trebuchet MS" color=#0 size="-2" >Small Value</FONT></TD> <TD align=right><FONT face="Trebuchet MS" color=#0 size="-2" >14.23</FONT></TD> <IMG height=3 src="http://im.morningstar.com/im/dot_clear.gif" width=422></TD> <FONT face="Trebuchet MS" color=#0 size=-1><FONT face="Trebuchet MS" color=#0 size="-2" >iShares Cohen & Steers Realty Majors <A href="http://quote.morningstar.com/switch.html?ticker=ICF" >ICF</A></FONT></FONT></FONT></TD> <TD align=right><FONT face="Trebuchet MS" color=#0 size="-2" >Specialty-Real Estate</FONT></TD> <TD align=right><FONT face="Trebuchet MS" color=#0 size="-2" >13.70</FONT></TD> <IMG height=3 src="http://im.morningstar.com/im/dot_clear.gif" width=422></TD> <FONT size="-2" >iShares Dow Jones US Real Estate <A href="http://quote.morningstar.com/switch.html?ticker=IYR" >IYR</A></FONT></FONT></TD> <TD align=right><FONT face="Trebuchet MS" color=#0 size="-2" >Specialty-Real Estate</FONT></TD> <TD align=right><FONT face="Trebuchet MS" color=#0 size="-2" >13.60</FONT></TD> <IMG height=3 src="http://im.morningstar.com/im/dot_clear.gif" width=422></TD> <FONT face="Trebuchet MS" color=#0 size="-2" >Small Value</FONT></TD> <TD align=right><FONT face="Trebuchet MS" color=#0 size="-2" >13.52</FONT></TD> <TD colSpan=3><IMG height=9 src="http://im.morningstar.com/im/422x9rule.gif" width=422></TD> <FONT face="Trebuchet MS, Arial" color=#666666 size="-2" >YTD returns through 04-12-02.</FONT></TD></TABLE></P> <P>After languishing for the latter half of the 1990s as the stocks of big, fast-growing companies dominated the market, small-value stocks and funds rallied in 2000 and 2001, gaining 18.1% and 17.3%, respectively. And the small-value group is still going strong. Smaller financial and cyclical industrial stocks, which comprise much of the small-value universe, still look undervalued when compared with their larger contemporaries and tend to flourish during economic recoveries, said Morningstar analyst Dan McNeela.</P> <P>That has boosted the fortunes of traditional funds that invest in underpriced, small-cap stocks, as well as like-minded ETFs such as streetTRACKS DJ US Small Cap Value <?XML:NAMESPACE PREFIX = MSTR /?><MSTR:SECURITY>DSV</MSTR:SECURITY>, iShares S&P SmallCap 600/BARRA Value <MSTR:SECURITY>IJS</MSTR:SECURITY>, and iShares Russell 2000 Value Index <MSTR:SECURITY>IWN</MSTR:SECURITY>. All three portfolios are heavily weighted in the financial and industrial sectors. Bank holding company Cullen/Frost Bankers <MSTR:SECURITY>CFR</MSTR:SECURITY> aided both iShares S&P SmallCap 600/BARRA Value and streetTRACKS DJ US Small Cap Value by rising 23.7% for the year through April 16. Similarly, title insurance company First American <MSTR:SECURITY>FAF</MSTR:SECURITY> rose 21.4% during the same period and helped both of the iShares small-value index funds. /?></P> <P>Mutual fund managers have been attracted to the real-estate investment trust, or REIT, industry because after losing money in 1998 and 1999 REITs looked undervalued in 2000, and  investors looking for safety from the reeling stock market and a strong dividend yield jumped into them, said Morningstar analyst Alan Papier.  </P> <P>REITs are still going strong in 2002. For the year to date through April 16, REITs have gained 11.84%. REITs, which are economically sensitive, have been buoyed by the prospects of an improved economy, which would create jobs and  improve office space demand, Papier said. Also, hotel occupancy rates have been recovering from the lows they hit after September 11, he said. </P> <P>IShares Cohen & Steers Realty Majors <MSTR:SECURITY>ICF</MSTR:SECURITY> and  iShares Dow Jones US Real Estate <MSTR:SECURITY>IYR</MSTR:SECURITY>, which each have gained more than 13% so far this year, have many successful top holdings in common. Equity Office Properties Trust <MSTR:SECURITY>EOP</MSTR:SECURITY> and Equity Residential Properties Trust <MSTR:SECURITY>EQR</MSTR:SECURITY> have gained 3.5% and 5.1%, respectively, this year through April 16. Other major holdings in both funds, Simon Property Group <MSTR:SECURITY>SPG</MSTR:SECURITY>, Archstone-Smith Realty <MSTR:SECURITY>ASN</MSTR:SECURITY>, and ProLogis Trust <MSTR:SECURITY>PLD</MSTR:SECURITY>, have been even more impressive, with respective 17.3%, 8.5%, and 12.9% returns in the same period.</P> <P> <TABLE cellSpacing="0" cellPadding="0" border="0" > <TR bgColor="#999999" > <TD vAlign="top" align="left" colSpan=3 height="1"1><FONT face="Trebuchet MS" color="#ffffff" size="-2" ><B> This Year's Worst-Performing ETFs</B></FONT></TD> </TD> <TD><IMG height="1" src="http://im.morningstar.com/im/dot_clear.gif" width=118></TD> <TD><IMG height="1" src="http://im.morningstar.com/im/dot_clear.gif" width=72></TD> <P><FONT face="Trebuchet MS" color=#999999 size="-2" ><B>Morningstar<BR>Category</B></FONT></P></TD> <TD align=right><FONT face="Trebuchet MS" color=#999999 size="-2" ><B>YTD Return<BR>( % )</B></FONT></TD> <FONT face="Trebuchet MS" color=#0 size="-2" >Specialty-Tech</FONT></TD> <TD align=right><FONT face="Trebuchet MS" color=#0 size=-1><FONT size="-2" >-28.86</FONT></FONT></TD> <IMG height=3 src="http://im.morningstar.com/im/dot_clear.gif" width=422></TD> <FONT face="Trebuchet MS" color=#0 size="-2" >Specialty-Tech</FONT></TD> <TD align=right><FONT face="Trebuchet MS" color=#0 size="-2" >-25.07</FONT></TD> <IMG height=3 src="http://im.morningstar.com/im/dot_clear.gif" width=422></TD> <FONT face="Trebuchet MS" color=#0 size=-1><FONT face="Trebuchet MS" color=#0 size="-2" >iShares Dow Jones US Internet <A href="http://quote.morningstar.com/switch.html?ticker=IYV" >IYV</A></FONT></FONT></FONT></TD> <TD align=right><FONT face="Trebuchet MS" color=#0 size="-2" >Specialty-Tech</FONT></TD> <TD align=right><FONT face="Trebuchet MS" color=#0 size="-2" >-24.24</FONT></TD> <IMG height=3 src="http://im.morningstar.com/im/dot_clear.gif" width=422></TD> <FONT size="-2" >iShares Dow Jones US Telecom <A href="http://quote.morningstar.com/switch.html?ticker=IYZ" >IYZ</A></FONT><FONT size="-2" > </FONT></FONT></TD> <TD align=right><FONT face="Trebuchet MS" color=#0 size="-2" >Specialty-Comm</FONT></TD> <TD align=right><FONT face="Trebuchet MS" color=#0 size="-2" >-23.51</FONT></TD> <IMG height=3 src="http://im.morningstar.com/im/dot_clear.gif" width=422></TD> <FONT face="Trebuchet MS" color=#0 size="-2" >Specialty-Tech</FONT></TD> <TD align=right><FONT face="Trebuchet MS" color=#0 size="-2" >-21.29</FONT></TD> <TD colSpan=3><IMG height=9 src="http://im.morningstar.com/im/422x9rule.gif" width=422></TD> <FONT face="Trebuchet MS, Arial" color=#666666 size="-2" >YTD returns through 04-12-02.</FONT></TD></TABLE></P> <P>All the funds on our laggards list have lost nearly twice the average open-ended specialty-technology mutual fund in Morningstar's database, which has shed 10.9% through April 16. You can blame these funds' telecom and  networking-equipment holdings, which have been among the hardest-hit securities during the bear market that began in 2000.</P> <P>Although they too have fallen this year, the Baby Bells have lost less than the rest of the telecom sector. The regional phone companies have stronger balance sheets and competitive positions than long-distance carriers, said Morningstar stock analyst Jay Ritter. SBC Communications <MSTR:SECURITY>SBC</MSTR:SECURITY>, Verizon <MSTR:SECURITY>VZ</MSTR:SECURITY>, and BellSouth <MSTR:SECURITY>BLS</MSTR:SECURITY> were down between 6.6% and 10.5% for the year to date through April 16. SBC and Verizon took up more than 40% of iShares Dow Jones US Telecom's <MSTR:SECURITY>IYV</MSTR:SECURITY>  assets. The ETF devotes another 10.3% to BellSouth.</P> <P>Unfortunately for iShares Dow Jones US Telecom, it also has stakes in long-distance carriers. In addition to the uncertain economy, the long-distance companies have been plagued by debt and falling prices, Ritter said. Competition from Baby Bells and a horrible fourth quarter has hurt the long-distance carriers, forcing them to cut back on spending. Qwest <MSTR:SECURITY>Q</MSTR:SECURITY> and WorldCom <MSTR:SECURITY>WCOM</MSTR:SECURITY> had lost about half their value for the year through April 16, and AT&T <MSTR:SECURITY>T</MSTR:SECURITY> and Sprint <MSTR:SECURITY>FON</MSTR:SECURITY> lost approximately 17% over the same period. </P> <P>Consequently, companies that sell long-distance carriers telecommunications gear have plummeted. Nortel Networks <MSTR:SECURITY>NT</MSTR:SECURITY> has dropped 46.4% for the year to date through April 16, Corning <MSTR:SECURITY>GLW</MSTR:SECURITY> 16.6%, and JDS Uniphase <MSTR:SECURITY>JDSU</MSTR:SECURITY> 34.6%. IShares Goldman Sachs Networking <MSTR:SECURITY>IGN</MSTR:SECURITY> counts all three stocks among its top holdings. Estimates for networking-equipment stocks keep coming down, and though there is some hope that networking-equipment sales are nearing a bottom, the likelihood of a recovery later this year is growing dim. "The market for the optical-networking systems these companies make is weak, and is likely to remain so, at least for the near term," Ritter said. </P>

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