4 ETFs On Fire Right Now : BBH, KBE, KRE, SPY, XHB

The majority of index investors have been able to close out 2011 with positive returns in the month of December. The SPDR S&P 500 ETF (ARCA:SPY) is up about 1% during the month and a number of index funds that had been on hot streaks coming into December have continued to push higher. Here are four ETFs on fire right now.

Straight to the Bank
After muddling through a challenging Q3, the SPDR KBW Bank ETF (ARCA:KBE) hit its stride in late November. This ETF, which tracks the performance of national money center banks, is up almost 5% during the month of December and over 10% since Thanksgiving.

U.S. banks have been concerned that forthcoming industry regulations might mandate higher capital requirements than the international proposal known as Basel III. Regulators have seemed to relent in the face of pushback from the banking industry. The Federal Reserve's final proposal on Tuesday indicates that banks in the U.S. could potentially face higher capital levels than those called for in Basel III.

Regional banks have also taken part in the recent rally. The SPDR S&P Regional Banking ETF (ARCA:KRE) has risen almost 6% in the month of December and is up about 12% since Thanksgiving. Low interest rates and tight lending spreads will continue to be hurdles for the regional banks in growing their earnings, but they appear to be on much steadier ground than they were a few years ago.

Building Confidence
Shareholders of homebuilding stocks have endured more than their fair share of pain over the course of the past few years. The trend has recently begun to reverse itself. The SPDR S&P Homebuilders ETF (ARCA:XHB) has gained around 2.25% during the month of December and is up almost 10% since Thanksgiving.

The homebuilder confidence index rose for its third consecutive month in December to reach its highest level of 2011. The industry is positioned to profit from record low borrowing costs which could bring additional consumers to the marketplace for a newly constructed home. A sputtering economy is one of the biggest threats to this industry, but for the time being the improvement is welcomed.

One other ETF that has been adding on to its recent gains is the Market Vectors Biotech ETF (AMEX:BBH). The fund is up about 3% during the month of December and around 10% since Thanksgiving. The success of BBH in 2012 will hinge largely upon the ability of large-cap players to generate strong cash flows from their existing products, as this fund only has 26 holdings.

The Bottom Line
The recent rally by banking stocks has enabled index investors to make up some lost ground heading into 2012. Homebuilding and biotech ETFs have also ended the year on a positive note. We will soon see whether the breakouts of these funds are for real or whether they are technical recoveries that may prove to be short-lived.