In general, 2010 has been a pretty solid year for most portfolios. Despite lingering concerns about unemployment and mounting debt burdens, most global equity markets have moved higher on the year. Commodity markets have been red hot, with prices of many natural resources climbing to new highs thanks to strong demand from emerging markets and a shaky dollar. And while bonds have shown exceptional volatility during the last 12 months, many fixed income securities have managed to deliver at least modest gains as well.
But there have, of course, been some disappointments this year as well. Below, we offer up some potential inspiration for contrarian investors: a list of ten of the worst performing ETFs of 2010. Performance data is as of December 21, and this list excludes all leveraged and inverse funds, as well as any ETFs that began trading during the year:
10. iPath EUR/USD Exchange Rate ETN (ERO): -9.0%
This fund shouldn’t be much of a surprise on this list, as the currency of the euro zone has struggled against most of its major rivals this year. With bailouts already extended to Greece and Ireland–and the much larger economies of Spain and Portugal seemingly headed down the same path–worries of a sovereign debt crisis across the pond have flared up over the last several months. Some have predicted that the euro experiment will ultimately fail, as stronger economies in the monetary union have expressed frustration with propping up their less fiscally responsible neighbors.
9. ELEMENTS S&P CTI ETN (LSC): -10.1%
LSC is one of the more creative commodity products, an ETN linked to an index that applies a long/short strategy to six commodity sectors comprised of 16 traditional physical commodity futures contracts. The individual commodities are grouped into six sectors (energy, grains, industrial metals, precious metals, livestock, and softs) and each sector, except the energy sector and softs sector, is represented on either a ‘‘long’’ or ‘‘short’’ basis, depending on recent price trends of that sector. The energy sector is represented on either a ‘‘long’’ or ‘‘flat’’ basis (protecting against the potential for a big loss from a short position if crude prices surge), and each commodity within the softs sector (cocoa, coffee, sugar, and cotton) is represented on either a ‘‘long’’ or short’’ basis separately rather than in the aggregate as a single sector.
The position of each sector is determined by comparing the current sector price to a moving exponential average, meaning that LSC essentially applies a momentum investment strategy to commodities. Unfortunately for investors in this ETN, losses from commodities that had been shorted led to less-than-impressive returns in 2010 [see Ideas For Contango Free Commodity Investing].
8. iPath Dow Jones-UBS Cocoa ETN (NIB): -12.9%
Many commodity ETFs have been among the best performers in 2010, as prices of everything from copper to gold to sugar have skyrocketed this year. But cocoa has been one of the few resources to sink over the last 12 months, as abundant supplies weighed on prices [see What's Killing The Cocoa ETF?]. NIB would have been much closer to the bottom of this list if not for a recent rally; a deteriorating geopolitical situation in cocoa-rich Ivory Coast has sent prices sharply higher in recent weeks.
7. MSCI Italy Index Fund (EWI): -14.8%
The obstacles facing the European economy have been well documented, but much of the anxiety has focused on sky-high unemployment in Spain, a crumbling banking sector in Ireland, and out-of-control government spending in Greece. Italy has generally stayed out of the headlines, but the country faces its fair share of challenges ahead. Debt burdens are mounting in an effort to fund retirement for an aging population, and resistance from unions has prevented a shift to a more flexible and efficient labor system. Facing the prospect of a prolonged period of slow economic growth, Italian equities have been pummeled in 2010.
6. MSCI Spain Index Fund (EWP): -20.5%
The second member of the Europe Equities ETFdb Category to make this list is probably not much of a surprise, as Spain’s economy has struggled to recover from the collapse of a building industry that sent unemployment skyrocketing. Though much of the developed world has moved on from the recession, the jobless rate in Spain is still close to 20% and the youth unemployment rate is twice that level. So it’s no surprise that many are concerned that Spain will follow in the footsteps of Ireland and Greece and find itself in need of a bailout in the not-so-distant future [see Three ETFs To Watch If Roubini Is Right About Europe].
5. S&P Global Clean Energy Fund (ICLN): -28.0%
The next few positions on this list are tied together by a common theme; 2010 was not a good year for the alternative energy industry. With the fiscal footing of many developed markets becoming less stable, aggressive austerity measures have become an increasingly common occurrence. Many cash-strapped governments have slashed or eliminated generous alternative energy subsidies, dealing a serious blow to nascent industries that are still struggling to come up with an economically viable business model. Europe in particular had been known for its support of alternative energy; as debt burdens have mounted, support for clean energy has dried up.
The Market Vectors Global Alternative Energy ETF (GEX) has also struggled in 2010, losing about 20% so far this year.
4. Market Vectors Solar Energy ETF (KWT): -28.2%
While many governments remain committed to developing clean energy alternative in coming decades, the current economic environment has made it difficult to support development of these technologies. Germany, for example, is moving forward with a plan to reduce subsidies and guaranteed prices for solar power this year. Germany, which accounts for a significant portion of solar energy installations, is expected to slow adoption of this technology in coming years, a development that has weighed on solar ETFs in 2010. The Guggenheim Solar ETF (TAN) is also down about 28% so far in 2010.
3. PowerShares Global Wind Energy Portfolio (PWND): -36.5%
This corner of the clean energy market has been flying into the wind all year, as some of the biggest proponents of wind energy have essentially given up hope. T. Boone Pickens, who has been promoting his “Pickens Plan” as a blueprint to reduce dependence on foreign oil for the last two years, recently announced that he is abandoning the wind business to focus on other alternative energy sources. In addition to a loss of subsidies, a significant drop in natural gas prices (more on this below) has helped to make wind energy uneconomical in the U.S. “Alas, market forces ruined the Pickens Plan,” writes Robert Bryce in a piece that explains the hurdles facing wind energy. “Mr. Pickens should have shorted wind.”
The First Trust ISE Global Wind Energy ETF (FAN) has also struggled mightily in 2010; that ETF is down about 32% on the year.
2. United States Natural Gas Fund (UNG): -44.4%
With more than $2.5 billion in assets, UNG is one of the most popular commodity ETFs available to traders today. Unfortunately for investors, it has also been one of the worst performing ETFs of 2010. Natural gas, a clean burning fuel, has actually gained momentum as a viable replacement to crude oil and has been touted as a potential “fuel of the future.” But the increase popularity of this fuel hasn’t translated into a jump in prices–it’s actually been the other way around. Massive new discoveries of natural gas have sent supplies to record highs, as have new technologies that allow the drilling industry to unlock gas from shale beds. Natural gas inventories are now close to 10% above five-year averages, sending prices down to just over $4/million BTUs.
It should be noted that while spot gas prices have plummeted in 2010, contango in gas futures markets has also eaten into UNG’s returns; because this fund invests in near-month futures contracts (which makes it a great short-term proxy for spot natural gas), it must roll holdings on a monthly basis. Other ETFs offering exposure to natural gas have also struggled this year; the iPath Dow Jones-UBS Natural Gas ETN (GAZ) has lost about 47%, while the United States 12 Month Natural Gas Fund (UNL), which spreads exposure across multiple maturities, is down about 39% [see Natural Gas ETFs: Seven Ways To Play].
1. iPath S&P 500 VIX Short-Term Futures ETN (VXX): -72.9%
Most investors don’t think of volatility as an asset class, but innovation in the ETF industry has made it possible for all types of investors to establish exposure to the VIX, an index that measures the market’s expectation of equity market volatility over the next month. Because the VIX generally spikes when investor anxiety is running high, this measure generally exhibits a strong negative correlation to stocks–making it a potentially powerful hedging tool or bear market bet.
The VIX is computed based on prices for various put and call options, and as such isn’t directly investable. It’s important to note that VXX is linked not directly to the VIX, but rather to an index comprised of futures contracts written on the VIX. And because the market for VIX futures is often in steep contango, the “roll yield” incurred creates some pretty stiff headwinds for investors who buy and hold VXX. While the spot VIX has lost about 25% on the year, the magnitude of VXX’s decline relative to that hypothetical return illustrates the potentially significant impact of contango on any futures-based strategy.
The mid-term VIX ETN from iPath (VXZ), which is linked to an index comprised of positions in the fourth, fifth, sixth, and seventh month contracts, didn’t fare quite as poorly; it was recently down only about 17% on the year [see VIX ETFs: Breaking Down All The Options].
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Disclosure: Thankfully, no positions at time of writing.