Global ETF awards

January 3, 2014 by  
Filed under Solar Energy Tips

But the world of Exchange-traded funds (ETFs) – which are essentially funds that trade like stocks – got so much more colorful in 2013 that we decided to roll out the red carpet. 

Although the classic SP 500 ETFs did great (shout-out to the Fed), many narrower, previously unloved ETFs in niches ranging from clean energy to social media to frontier markets became wildly successful. 

The industry’s rapid pace of innovation is likely to continue in 2014, when the ETF spotlight should shift to new ways of investing in emerging markets and innovative approaches to active management. 

To come up with the awards, Bloomberg ETF analyst Eric Balchunas weighed performance, inflows and a fund’s ability to get investors’ attention, or even capture their imagination. 

Best US equity ETF

Vanguard Total Stock Market was the way to ride the stock market bull in 2013. It returned 28.9 percent, a touch more than the SP 500, thanks to its 12 percent stake in small- and mid-cap stocks. It was one of only six ETFs to attract more than $6 billion in new cash. VTI gives investors exposure to 3,600 stocks for a fee of 0.05 percent, the best deal among equity ETFs and the ultimate “set it and forget it” fund.

The worst-performing equity ETFs, such as the PowerShares SP 500 Downside Hedged Portfolio, had some kind of hedge for protection in down markets. Still, “bad” performance is relative. PHDG returned 11 percent.

Before this year, many investors didn’t know what a senior loan was. (For those who still don’t know, it’s basically a high-yield bond with a floating interest rate.) What investors did know was that a yield of 4 to 5 percent was hard to find. It was especially attractive in a fund that didn’t have much to fear from the possibility of rising interest rates, because senior loans float with those rates. The $4.8 billion that flowed into PowerShares Senior Loan Portfolio (BKLN) in 2013 was rewarded with a 4 percent return. 

Among the poorest performers in fixed income was the iShares TIPS Bond ETF (TIP), which lost 8.9 percent with a 1 percent yield. (Yield is the income an ETF pays out, while total return includes fluctuations in market value.) It also lost $7.3 billion in cash as investors pulled out of any ETF holding bonds with maturities over 2 to 3 years.

Nearly every commodity fund was down for the year. United States Brent Oil Fund LP (BNO) was an outlier, returning 5.1 percent, edging out its fraternal twin, the United States Oil Fund LP (USO). While USO is a play on U.S. oil, BNO holds futures contracts for oil that comes from overseas, making it a benchmark for Middle Eastern oil. Geopolitical tensions such as the turmoil in Syria helped performance, along with tight supply in markets outside the U.S. 

The Worst Commodities ETF honors go to the SPDR Gold Trust (GLD). In 2013, it went from the second-largest ETF to the eighth-largest, as gold prices fell 26 percent and it lost $24 billion.

Two of the best-performing international investments this year were Europe and Japan, which make up 80 percent of iShares MSCI EAFE ETF’s (EFA’s) holdings. That helped the ETF return 16 percent and haul in $5.7 billion in assets. With total assets of $50 billion, EFA vaulted past the Vanguard Emerging Markets ETF (VWO) to become the world’s largest international ETF. All in all, international developed-market ETFs took in north of $60 billion, more than twice last year’s amount. 

On the other side of the coin, VWO returned -6.8 percent and lost $7.8 billion in cash. That was the third-biggest outflow after GLD and the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD). 

If we gave out only one award to the ETF of the year, it would be WisdomTree Japan Hedged Equity Fund (DXJ). It returned 34 percent while attracting new inflows of $9.4 billion, more than all ETFs except the largest one, the SP 500 Trust (SPY). By betting on a rise in Japan’s exporters and against the yen, DXJ was perfectly positioned to profit from Japan’s move to depreciate its currency to bolster exports. The concept of packaging a specific trade (long stocks, short currency) into an ETF foreshadows a future of “solution-oriented” ETF launches. 

The big country loser was the iShares MSCI Brazil ETF (EWZ), down 19 percent. Investors spooked by Brazil’s high inflation and lackluster growth pulled $3.5 billion out of the fund, the biggest outflow of any single-country ETF. 

Cambria Shareholder Yield ETF (SYLD) showed the ETF world that a small independent issuer could innovate, outperform and collect assets. With $170 million in assets, it became the second-largest actively managed equity ETF. SYLD returned 14 percent since its inception in May, four percentage points more than the SP 500 in that period. It picks stocks based on the concept that equity “yield” doesn’t come from just dividends but also from share buybacks and paying off debt. After choosing 100 such high-yielding stocks, the ETF weights them all equally. 

The worst launch: the Global X Central Asia Mongolia ETF (AZIA). With just $2 million in assets, it’s down 11 percent since its April debut.

In a year when every one of the top four overall best-performing ETFs was in the clean-energy field, Guggenheim Solar Energy ETF (TAN) led the energy sector by returning almost 120 percent. This time last year, TAN was down 94 percent from its all-time high, and anyone who invested would have been considered crazy. With Elon Musk and Warren Buffett both interested in solar, this ETF has earned new respect, as investors added $220 million in new cash. 

Metals and mining, led by the Market Vectors Goldminers ETF (GDX), was the worst sector, falling 55 percent. It was sent to new lows by a drop in gold’s price, subdued inflation and worse-than-expected miner profitability, according to Bloomberg Industries.

It was a tough year for hedge funds, which suffered bad publicity and bad performance, averaging only 7 percent (although some hedge funds aren’t trying to beat the market). Adding insult to injury, an ETF that picks stocks from hedge fund managers’ own quarterly regulatory filings ran laps around many of the funds it mimics, for a fraction of a hedge fund’s cost. Global X Guru Index ETF (GURU) returned 41.7 percent while yielding 4 percent. This explains why it grew 150-fold from $2 million to $314 million. 

The Worst Niche ETF award goes to the Global X Uranium ETF (URA), which was down 25.4 percent. Uranium suffered from low demand and from announcements by countries such as Germany and France that they intend to phase out nuclear power.

One of the most valuable traits of ETFs is the way they let individual investors into areas that were previously hard to access. Nothing has been harder to get into in the past than China A-shares, which trade on China’s mainland and were available only to Chinese citizens and a few qualified foreign institutions. db-X-trackers Harvest CSI 300 China A-Shared Fund (ASHR), a China A-share ETF launched Nov. 6, has expanded its assets to $190 million in its first month. (An existing China A-share ETF, Market Vectors China ETF, or PEK, uses derivatives to get exposure to China A-shares.) 

Honorable mention goes to the ProShares Investment Grade-Interest Rate Hedged ETF (IGHG), which invests in a portfolio of corporate bonds and then shorts Treasuries to eliminate interest rate risk, the scariest demon in the investing world right now.

Global X Social Media ETF (SOCL)  and iShares Frontier Markets ETF (FM): Both of these ETFs were tiny a year ago, and considered gimmicky and dangerous. Whether they’re gimmicks or not, they’ve each seen assets grow tenfold in the past year. Stakes in Twitter and Facebook as well as non-U.S. social media stocks have helped power SOCL to a 56 percent gain, compared with 22 percent for the tech elder statesman, the SPDR Tech Sector ETF (XLE). SOCL will get another jolt next year when the giant Chinese e-commerce company Alibaba goes public. 

The iShares Frontier Markets ETF returned 21 percent, while its big brother, the iShares Emerging Markets ETF (EEM), had a -5.9 percent return. In 2014, FM will lose its stakes in Qatar and the United Arab Emirates, as those countries take on emerging-market status. That will actually improve FM’s Middle East-heavy regional diversification.

The Exchange-Traded Mutual Fund

In 2014, if the Securities and Exchange Commission approves it, investors could see the first exchange-traded mutual fund, also known as a non-transparent actively managed ETF. This is a new structure in which, unlike with a regular ETF, investors can’t see its holdings every day. What they can do is trade the fund throughout the day, like an ETF, and the fund can trade at a premium or discount to the value of its underlying assets. If ETMFs are approved, it could open up the floodgates for fund companies like Eaton Vance Corp. and T. Rowe Price Group, which have been reluctant to launch ETFs because they don’t want to show fund holdings every day. 

Emerging markets 2.0

The definition of an emerging-market ETF is evolving beyond the BRIC set of Brazil, Russia, India and China. Exchange-traded funds like the SPDR MSCI EM Beyond BRIC (EMBB) and the Global X Next Frontier ETF (EMFM) aim to capture some of the more truly “emerging” countries such as Mexico, Thailand and Poland. In addition, ETFs such as the fast-growing EGShares Emerging Markets Consumer ETF (ECON) allow investors to play the “rise of the middle class” and “domestic demand” stories within emerging markets. Another rising star is the iShares MSCI Emerging Markets Minimum Volatility ETF (EEMV), which aims to give skittish investors a smoother ride. These innovative products are the reason the popular BRIC-heavy VWO and EEM saw their share of emerging-market assets decline this year by a combined 5 percent.

2013’s losers to watch 

This time last year, some of the most depressed and downright disdained ETFs were solar energy, Japan and Europe. Those turned out to be 2013’s big winners. The only problem with investing in beaten-up areas of the market? Sometimes they fall further. Yet inevitably some of today’s losers will emerge as tomorrow’s winners and we’ll forget we ever hated them so much. 

Some of today’s losers to watch include the Market Vectors Gold Miners (GDX), down 54 percent; ETFS Physical Precious Metals Basket Trust (GLTR), down 27 percent; the Market Vectors Coal ETF (KOL), down 22 percent; the GreenHaven Continuous Commodity Index Fund (GCC), down 10 percent; and the Market Vectors Russia ETF (RSX), down 6 percent. 

China

Goldman Sachs predicts the Chinese economy will expand 7.8 percent in 2014. This is on the heels of the government’s push to make the economy more consumer-driven and relax restrictions on foreign investment. In this environment, one ETF to watch will be the Global X China Consumer Fund (CHIQ), which tracks mainland consumer companies underrepresented in the largest China ETF, the iShares China Large-Cap ETF (FXI).

Also worth watching is the Guggenheim China Small Cap Index ETF (HAO), tracking small companies, and the KraneShares CSI Five Year Plan ETF (KFYP), which tries to track companies in sectors the Chinese government has stated it wants to see thrive.

Finally, look out for the possible launch of a new one-stop-shop China ETF that tracks all of the different China shares in one fund. 

How smart is ‘Smart Beta’?

“Smart beta” ETFs, which had a breakout year in 2013 in performance and inflows, are funds that aren’t linked to traditionally designed indexes. While indexes like the SP 500 weight stock holdings by market capitalization, smart-beta ETFs use fundamentals or dividends. Some smart-beta funds, like the Guggenheim Equal Weight SP 500 ETF (RSP), give every stock an equal weight regardless of its market cap. In RSP’s case, that gives more voice to smaller large caps. 

Thus, in a year when smaller-cap stocks went on a tear, RSP beat the SP 500 Trust (SPY) by 3 percentage points. If that reverses in 2014, will this strategy be considered dumb? This is why the term “smart beta” is misleading. “Strategic beta” is more like it.

©2014 Bloomberg

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