Seven Best ETF Performers Of Q1 (And Five Of The Worst)

by on April 4, 2011 | ETFs Mentioned:

The first quarter of 2011 is officially in the books, and the last three months have been a stretch marked by instability both domestically and abroad. Significant uncertainty remains, as investors are still divided on the outlook for interest rates, further stimulus measures, and the ability of emerging markets to continue driving global GDP growth. Despite the lingering concerns, the first quarter was a generally strong stretch for most portfolios. The broad-based SPY added a little more than 5% during the last three months, while the most popular emerging markets ETF (VWO) added close to 2%.

Several ETFs have turned in blistering performances to start the year, surging by more than 20% in the first quarter of 2011. Among the best performers are a number of funds investors might expect, as well as several that likely wouldn’t come to mind immediately. Below, we profile the seven best ETF performers during the first quarter of the year [see a complete Excel book of ETFs sorted by category, including YTD performance, expense ratio, and inception date for each]:

7. SPDR S&P Oil & Gas Exploration & Production ETF (XOP): Up 22.7%

A number of ETFs on this list were aided by a surge in oil prices in the first quarter, as uncertainty in the Middle East send energy commodities sharply higher. This ETF is linked to an equal-weighted index made up of firms engaged in the exploration and production of oil and natural gas supplies. With prices surging, the demand for the services of such companies has climbed sharply higher as well, putting XOP on pace to more than double in price this year.

6. Market Vectors Solar Energy ETF (KWT): Up 23.1%

Solar energy was one of the worst performing sectors of 2010, as the entire alternative energy space missed out on a year-long rally in equity markets. Last year’s drop was primarily related to the challenging economic environment; cash-strapped governments across Europe were forced to cut or eliminate subsidies for alternative energy, dealing a blow to the young industry.

Solar energy’s rise this year has come not from a reversal of this trend, but as a result of the fallout from the Japanese earthquake. Anxiety over expanding the use of nuclear power, combined with skyrocketing oil prices (see above, and below) has pushed other sources of energy into the spotlight, and brightened the outlook for solar power [Three Alternative Energy ETFs To Watch As Japan Drama Plays Out].

5. United States Brent Oil Fund (BNO): Up 24.6%

Brent oil has been on a tear in 2011, as the wave of protests across the Middle East has placed strong upward pressure on oil prices. The spike in geopolitical tensions overseas, combined with soft demand in the U.S., has created a disconnect between various oil contracts and threatened the dominance of WTI as the default benchmark [see Explaining The Big Gaps In Oil ETF Performance].

The United States Oil Fund (USO), which offers exposure to WTI contracts traded on the futures exchange in New York, has also rallied in 2011 but trails far behind BNO. USO is up just over 9% year-to-date.

4. S&P SmallCap Energy Portfolio (PSCE): Up 25.0%

Continuing the dominance of energy-related products on this list, the PowerShares small cap fund has gained 25% through just three months of the year. PSCE can be thought of as the small cap counterpart to the popular XLE, as this fund offers exposure to small cap companies in the energy sector. Whereas the sector SPDRs carve up the universe of large cap companies, the suite of small cap ETFs from PowerShares divides up the S&P SmallCap 600 Index.

The distinction between small caps and large caps has been a big one in the first quarter, at least as far as the energy space is concerned. All of the products in the Energy Equities ETFdb Category enjoyed a strong start to the year, but all of those focusing on large cap securities have lagged behind PSCE. The ultra-popular XLE is up just 16.9%, a gap of more than 800 basis points to the small cap counterpart [see For ETF Investors, The Details Matter].

3. ELEMENTS CS Global Warming ETN (GWO): Up 30.8%

If you’ve never heard of GWO, you’re not alone; this exchange-traded note has under $5 million in assets. GWO is linked to the Credit Suisse Global Warming Index, a benchmark consisting of companies that have a focus on products or services related to minimizing global warming. Themes represented in the benchmark include demand management, emissions limitation, renewable energy, and renewable fuels.

GWO is structured as an exchange-traded note, meaning that it is a debt instrument linked to the performance of the aforementioned index.

2. B2B Internet HOLDRS (BHH)

This product isn’t actually an ETF, and the current composition of the fund makes it one of the least useful exchange-traded products out there. BHH consists of just two companies; Ariba Inc. accounts for about 92% of assets while Internet Capital Group makes up the remainder. This hyper concentration is a result of the manner in which HOLDRS products are constructed and maintained; there is no underlying index and no rebalancing [see Five Facts Every Investors Should Know About HOLDRS].

Ariba stock (ARBA) has surged this year, and BHH is little more than a vehicle offering exposure to that company (with a meaningful expense ratio built in). If you’ve been lucky enough to own this product–it has only about $11 million in assets–it might be time to sell and find a more efficient use of the capital [see Curious Case Of The B2B Internet HOLDRS].

1. iPath Dow Jones-UBS Cotton ETN (BAL): Up 42.7%

This exchange-traded note has been by far the best performer year-to-date, surging thanks to continued worries that demand will outpace supply. Cotton prices have hit all time highs several times this year, as strong demand from China, India, and other emerging markets have sent this soft commodity sharply higher. Heavy rains in Australia and Pakistan–two major cotton producers–have also contributed to the sharp run-up in cotton prices.

It’s interesting to note that the seven ETPs profiled above have aggregate assets of only about $2 billion–and $1.5 billion of that is in XOP. It turns out that bigger isn’t always better [see Commodity ETFs Get No Love From Investors].

Worst Performers

Several ETFs struggled mightily in Q1; below, we profile the worst performer year-to-date:

5. iPath Sugar ETN (SGG): Down 10.3%

Sugar prices have declined off of record highs in 2011, as concerns about supply shortages have eased slightly. The market for sugar prices remains backwardated, suggesting that perhaps some investors believe prices will continue to ease. Of course backwardation also creates some attractive tailwinds for investors.

4. Mars Hill Global Relative Value ETF (GRV): Down 11.6%

This actively-managed ETF is a long/short fund, making the abysmal performance in 2011 even more noteworthy. GRV has made some poorly-timed bets on sector-specific and country-specific ETFs. Currently, the biggest short bets are on European financials (through EUFN) and Australia (through EWA).

GRV attracted strong cash inflows initially, quickly racking up more than $40 million in assets. But the poor performance has put a dent in AUM; the fund now has less than $20 million invested [see Using ETFs To Access Alternatives].

3. India Small-Cap Index ETF (SCIF)

India has been one of the fastest-growing economies in the world, but the country’s stock market has dropped on fears over accelerating inflation and intensifying infrastructure needs. Small cap Indian stocks have been the hardest hit so far this year; the large cap-heavy INDY was down just over 4% in the first quarter.

2. Egypt Index ETF (EGPT): Down 20.0%

This fund’s inclusion on the list of worst performers during the first quarter of 2011 is probably no surprise; the north African country has undergone a transfer of power that has introduced new elements of uncertainty and caused the Egyptian Stock Exchange to be closed for nearly two months.

EGPT has given investors a lesson in the nuances of ETF investing this year, as the fund has continued to trade while the underlying securities were inaccessible. After weeks of acting as a price discovery mechanism, the premium in EGPT finally disappeared when markets reopened in Cairo. But that wasn’t enough to recover all the value lost during the protests [Egypt ETF Back To Normal].

1. Uranium ETF (URA): Down 27.5%

It might be surprising that a Japan ETF isn’t represented on this list given the circumstances surrounding the world’s third-largest economy. But URA’s dismal performance is tied directly to the earthquake and resulting crisis overseas. As Japan teeters on the brink of a nuclear disaster, anxiety about using nuclear power as a fuel source has intensified around the globe. That has sent uranium prices sharply lower and crushed the outlook for companies engaged in the nuclear power industry. URA offers exposure to many of these companies, as the underlying securities are engaged in the extraction, refining, and sale of uranium, an element whose primary use is in nuclear power plants [see Nuclear ETF Meltdown].

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Disclosure: No positions at time of writing.