The last five years have seen a tremendous expansion of the ETF industry, as assets have skyrocketed and the number of products available to U.S.-based investors has multiplied. That same period of time has also been a period of tremendous volatility in global financial markets; the last five years have witnessed an unprecedented financial crisis, one of the most severe recessions in history, and a remarkable recovery in both 2009 and 2010.
A look back at the performance of exchange-traded funds over the last five years (ending October 31) highlights the tremendous growth of the ETF industry as well as the challenging realities of recent history. Though there are now more than 1,350 ETPs, only 330 or so were launched before November 2006. Of those that are still in existence, about half have delivered negative returns over that period–a remarkable testament to the impact that the volatility of recent years has had on portfolios.
But the news isn’t all bad; several exchange-traded products have delivered big gains in recent years, helping to cushion the blow from freefalls in stock markets. While some of the big winners are likely obvious (spoiler alert: precious metals have done pretty well), others are somewhat surprising inclusions on this list.
Past performance, of course, is not indicative of future returns. But even if a look back won’t necessarily deliver the secrets to picking winners going forward, it is an interesting exercise that reveals some unexpected products that have thrived amidst the chaos of the last several years:
10. Latin America 40 Index Fund (ILF): Up 57%
This popular iShares ETF offers exposure to major Latin American economies, including Brazil, Mexico, Chile, Peru, and Colombia. The Brazilian economy has been one of the few bright spots in recent years, as energy independence, a wealth of natural resources, and surprisingly stable government and fiscal policies have boosted the BRIC member.
As the recovery from the financial crisis gained steam, Brazil’s neighbors also made big contributions to the performance of this fund; Colombia, for example, has been home to one of the hottest stock markets for the last several years.
ILF, launched back in 2001, can be traded commission free in TD Ameritrade accounts. One of two inclusions from the Latin American Equities ETFdb Category on this list, ILF has about $1.8 billion in assets.
9.Market Vectors Gold Miners ETF (GDX): Up 59%
This fund probably isn’t much of a surprise given the meteoric rise of gold prices over the last several years (more on that below). GDX consists of many of the largest mining companies in the world, essentially delivering indirect exposure to gold prices. The companies found in this ETF are engaged in the extraction of precious metals, and as such their profitability generally depends on the prevailing market price for the products they sell. As gold and silver prices have climbed, so too have profits for the mining industry–which has propelled GDX into this impressive list.
It is also interesting to note, however, that the gains turned in by GDX–while certainly impressive–have fallen short of the performance of the underlying metal.
8. Barclays 20 Year Treasury Bond Fund (TLT): Up 59%
Long-term bonds have defied multiple predictions of a bubble, the first of which came back in 2009. With interest rates at record lows, investors have found it hard to scrape up meaningful yields at the short end of the maturity spectrum, prompting many to take on some interest rate risk in exchange for a bit of current return.
And for all the concern about the mounting debt burden in Washington, Treasuries have maintained their safe haven appeal. The combination of those factors has pushed TLT, which focuses on long-term government debt, higher over the last five years. While TLT is the only long-term ETF with a track record long enough to be included in this list, some other funds have stolen the spotlight in 2011. ZROZ has gained about 50% this year, as has EDV. For those who gravitated towards this asset class for the stability, those returns have no doubt been a pleasant surprise.
7. Rydex S&P MidCap 400 Pure Growth (RFG): 61%
This fund might be the biggest surprise on the list, especially since other members of the Mid Cap Growth ETFdb Category trail behind this Rydex product by a wide margin. The popular iShares S&P 400 Growth Index Fund (IJK), for example, was up only about 29% over the same period. That’s still a pretty impressive return–SPY was down about 2% during that period–but comes up far short of RFG.
The big gap is evidence of the potentially significant impact that seemingly minor nuances in methodology can have on bottom line returns. RFG is part of the “pure style” suite of ETFs from Rydex that include only stocks exhibiting the strongest value or growth characteristics. Funds just as IJK, on the other hand, tend to cast a wider net; a number of the components of that ETF are also found in the iShares S&P 400 MidCap Value Index Fund (IJJ).
The pure value focus of RFG, which has fewer than half the holdings of IJK, has translated into a huge payoff for investors [see RFG vs. IJK head-to-head].
6. iShares MSCI Brazil Index Fund (EWZ): Up 68%
As mentioned above, Brazil’s economy has been one of the brightest spots on the map over the last few years. The South American market has raced ahead thanks in part to skyrocketing commodity prices; as a major exporter of a number of natural resources, the boom over the last few years has lined government coffers and allowed for increased flexibility during wild times.
EWZ is also one of the most popular equity ETFs, with more than $10 billion in assets. This fund is linked to the MSCI Brazil Index, which has about 90 individual components. EWZ is a bit top heavy; the top ten account for about 60% of total assets. The largest sector allocations in this ETF, which can be traded commission free on TD Ameritrade, are materials, financials, and energy.
5. iShares MSCI Malaysia Index Fund (EWM): Up 86%
Though the meteoric rises of funds focusing on BRIC economies such as China and India have been well chronicled, it is the relative unknown Malaysia that has been the best performing market over the last five years (at least as measured by pure play ETFs).
Malaysia has one of the lowest unemployment rates in the world, and has strengthened relations with several other Asian powerhouses in recent years. The strong performance out of Malaysia is nothing new; between 1957 and 2005, real GDP grew by 6.5% annually, a mind-boggling figure over such a prolonged period of time.
EWM has about 45 holdings in total, with financials and industrials combining to account for about half of assets.
4. Biotech HOLDRS (BBH): Up 163%
This product is part of the lineup of HOLDRS funds that Merrill Lynch launched in the late 1990s; while not technically a 1940 Act ETF, BBH trades in generally the same way as true exchange-traded funds. Many of this product’s components have been acquired over the last few years as a wave of M&A activity has swept across the biotech space, pushing this fund sharply higher over the last few years.
The purchase of BBH components has also resulted in some significant concentration; BBH currently holds a portfolio of only about ten stocks, with well more than half of total assets in Amgen and Biogen. BBH is scheduled to be converted to a traditional ETF in the fourth quarter, when it will come under the Van Eck lineup.
3.iShares Silver Trust (SLV): Up 164%
Welcome to the precious metals portion of this list; silver may be less popular as an investment vehicle than gold, but its returns have been nearly as impressive over the last few years. SLV is a physically-backed fund, meaning that the underlying assets are simply silver bullion, and that the price of this fund will move in unison with spot silver prices.
There are a couple of other exchange-traded funds that offer exposure to silver prices; ETF Securities offers the ETFS Physical Swiss Shares (SIVR) and Global X has a fund in its lineup that offers access to companies engaged in the extraction and production of silver (SIL).
The inclusion of these ETFs shouldn’t come as much of a surprise; gold thrived during the crisis as investors flocked to safe havens, and was able to continue to rally afterwards amidst lingering uncertainty, desire for dollar diversification, and hefty bets on the metal by some big hedge funds.
It is interesting to note that IAU has outperformed the much more popular GLD during the last five years. Part of that performance gap is attributable to the differential in expenses; at just 0.25%, IAU is essentially guaranteed to outperform GLD (which charges 0.40%) over the long haul.
Both of these two ETFs are tremendously popular; aggregate assets in these funds total more than $75 billion.
1. B2B Internet HOLDRS (BHH): Up 192%
BHH isn’t technically an ETF, but rather a member of the quirky HOLDRS family of products. And this is one of the most bizarre securities on the market; the underlying portfolio currently consists of just two stocks, Ariba, Inc. (which makes up about 93% of assets) and ICG Group. That wasn’t always the case; once upon a time, BHH consisted of a number of firms that provided B2B services over the Internet. But over the years, almost all of the components were either acquired or went bankrupt [see Curious Case of The B2B Internet HOLDRS].
BHH is the smallest and least popular product on this list, with just $16 million in assets. It’s also interesting to note that the end of the road is approaching for BHH; along with several other HOLDRS, this product is scheduled to be shut down before the end of the year. Several HOLDRS products are slated to be converted to traditional ETFs and merged into the Van Eck lineup.
Disclosure: No positions at time of writing.