This year started off strong, as it looked like the economic recovery was finally gaining some steam. Major indexes trended upwards for the first seven months of the year, with the S&P 500 hitting 1,370 at its peak. It marked good progress as we exited the “Lost Decade” where most indexes finished where they were back in 2000, marking a ten year drought of little to no returns. But just when it seemed like we finally found our footing, a number of factors combined to create the perfect storm for equities, slaughtering a variety of investments and benchmarks [see also Three ETFs For ‘Operation Twist’].
First, markets took a hit when Congress nearly failed to extend the debt ceiling, which would have essentially frozen government spending. Though the legislation was finally passed, investor confidence was rattled as it seemed that Washington was more concerned about politics than the well-being of the economy. Next came the first every downgrade of U.S. debts by a domestic rating agency as Standard & Poor’s booted us from the exclusive AAA-rated club. Though there have been a few countries to come back from similar downgrades, it proved to be a major blow for nearly every investment class. The trading days that followed saw the S&P 500 dip from roughly 1,350 down to as low as 1,101, marking a 18.4% drop in just a matter of days.
But the bad news didn’t stop there, as it was revealed that Greece was yet again in danger of defaulting on their sovereign debt. This led to an enormous amount of speculation as to whether or not they would be forced to leave the euro, or if big name countries like Germany would secede from the euro-zone altogether and return to the Deutsche mark as its currency. Though things have somewhat calmed, each day brings news from the euro-zone that seems to sway markets in either direction, painting an overall cloudy picture for the future of the tarnished euro [see also What’s Crushing The Austria ETF (EWO)?].
As these issues from all around the world have persisted, saying that equities have struggled would be quite the understatement. A number of funds from entirely different, unrelated, asset classes are negative on the year simply due to the uncertain outlook on the global economy. Perhaps one of the most popular sectors to monitor is the large cap segment of our economy, which features the bellwether firms that are typically a good barometer for our future. The best-known fund comes from the ETF king, SPY, which features all 500 hundreds from the underlying S&P 500. The fund has dropped 4.4% on the year, frustrating investors who saw it posting healthy gains through H1 2011. Below, we outline several some of the biggest winners and losers when it comes to large cap ETFs:
E-TRACS S&P 500 Gold Hedged ETN (SPGH)
This fund employs a unique strategy that has made it one of the best performing exchange traded products this year. SPHG tracks an index which seeks to simulate the combined returns of investing equal dollar amounts in the S&P 500 Total Return Index and long positions in near-term exchange-traded COMEX gold futures contracts to help hedge against losses in either direction. The fund charges an expense ratio of 0.85%, but the steep expenses may be worth it upon seeing its robust returns [see also Three Reasons Why Gold Is Overvalued].
This ETF raked in over 24.5% on the year, proving its methodology to be sound. To be fair, it isn’t a full equity ETF, as it has a large amount of assets in gold futures, but as far as its place in your portfolio is concerned, it is a single equity ticker with a strong investment thesis. SPGH gives investors the best of both worlds, as it hedges against dips in the stock market, making it a perfect allocation for the current environment. Investors should note that the SPDR Gold Trust (GLD) has jumped 26.4% on the year, which likely means that the S&P 500 exposure offered by SPGH has been negative thus far, but by hedging itself in both asset classes, it has earned its keep as far as 2011 is concerned.
Defensive Equity ETF (DEF)
This winner comes from yet another product with a non-traditional strategy, suggesting that the innovation in the ETF space is especially helpful in rocky markets. DEF tracks an index which seeks to identify companies with potentially superior risk/return profile as determined by the index provider. The fund is specifically designed to hold its head high during times of weak economies/markets, so what better time to put its methodology to the test?
DEF, while not the best-performing fund on the year, has posted gains of 4.3% thus far, nearly a perfect inverse of SPY. Investors should note that this product isn’t designed to produce massive gains, but rather it intended to be a good safe haven to hold assets until waters calm and it comes time to dive back into general equities. As such, its performance on the year is impressive, proving its strategy to be extremely effective. The fund also pays out a nice dividend yield of 1.5%, adding a healthy income stream to your basket of holdings [see also Five Defensive ETFs To Own When The Market Corrects].
S&P Equal Weight ETF (RSP)
This Rydex fund invests in the S&P 500 with a unique twist; an equal-weighted strategy. Where SPY overweights its top holdings and under-represents those near the bottom of the list, RSP ensures that each individual component of the index is given fair representation, a strategy that has been outperforming SPY for a number of years. But RSP’s lead seems to be slipping, as it makes the “Duds” list for 2011, at least so far.
The fund has lost roughly 5.8% since the start of the year, suggesting that its equal weight strategy doesn’t hold up well to market instability. When bull markets are in, this fund will typically generate better returns than SPY, as its trailing one, three, and five year gains are all higher than the king of the exchange traded world. A closer look into the fund reveals a beta of 1.1 which is likely one of the reasons that it has lagged behind SPY. Investors should also note that RSP is 31 basis points more expensive than SPY, which may turn some off as they are paying more money and underperforming in the current environment. RSP may be your best bet during bull runs, but it may be worth reconsidering for the short term [see also Three Intriguing Alternatives To Popular ETFs (SPY, XLF, FXI)].
S&P 500 Value Index Fund (IVE)
This ETF is relatively straightforward in that it simply measures the performance of the large capitalization value sector of the U.S. equity market. The fund has a current market cap of about $3.7 billion and an average daily volume nearing 490,000. Being a value fund, IVE pays out a nice dividend yield of 1.3% for its investors, but its negative performance far outweighs its quarterly payout. This product has tanked nearly 8.1% on the year, making it one of the biggest losers when it comes to large cap ETFs [see also Dividend Special: Top Companies In Every Major Commodity Sector].
For most investors, a value fund is all about little movement with steady income, but IVE’s performance on the year has proven it to be a bit more risky. Though its top holdings include household names like Exxon, Chevron, and General Electric, the value twist has seemingly created strong headwinds for the product. Looking deeper into its past, IVE has done nothing but struggle with negative returns in the trailing three and five year stretches, something investors may want to note before making an allocation.
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Disclosure: No positions at time of writing.