Ten Unexpected Observations On YTD ETF Returns

by on December 4, 2011 | ETFs Mentioned:

With the finish line in sight, it’s fairly safe to say that 2011 will be remembered by most investors as a wild, back-and-forth year that brought plenty of both hope and despair. A hot start raised optimism of a continued recovery after a generally impressive 2011, but the summer months were anything but relaxing; major indexes suffered some of the worst losses since the recent recession.

In examining the year-to-date performances for the 1,000+ ETPs that have been around since the beginning of the year, there are a number of interesting figures that jump out, including both pleasant surprises and bitter disappointments–and some that are just plain confusing [the complete, sortable, document is available in ETF Edge--sign up for a free 7-day trial to get full access].

10. Commodities Holding Up

This year has been a tumultuous period for risky assets, especially over the last several months. So I was a bit surprised to see that commodities have been holding up quite nicely; the ultra-popular DBC is hovering around break even, as are several other broad-based ETPs. A few of the more impressive performance: the Teucrium Corn Fund (CORN) has been a big winner all year, and the ETRACS Bloomberg CMCI Livestock ETN (UBC) has quietly delivered some nice returns.

9. Cap Weighting Fights Back

The impact of weighting methodologies on bottom line returns has been a popular topic in recent years, with attention paid to the fact that cap-weighted products have regularly lagged behind alternatives such as equal weighting. But 2011 has seen a mild reversal of this trend, at least in certain asset classes. The cap-weighted S&P 500 SPDR (SPY) is poised to beat the equal-weighted RSP this year, snapping a string of underperformance relative to the increasingly popular alternative methodology.

8. Blistering Returns From Long Term Bonds

At the beginning of the year, a host of experts were predicting doom and gloom for long-term bonds during an anticipated climb in interest rates. But those who took the contrarian view have been handsomely rewarded, as the decision to take on interest rate risk has turned out to be a brilliant move. PIMCO’s 25+ Year Zero Coupon U.S. Treasury Index Fund (ZROZ) has added more than 50% so far in 2011, with long-dated counterparts such as EDV and TLT not too far behind. 

7. What A Difference A Sector Makes

One can’t help but notice the dismal returns delivered by just about every fund in the Financials Equities ETFdb Category in 2011; the all 34 were in the red, with several losses exceeding 20% so far this year. But what really drew my eye were the impressive returns from the pair of products that specifically exclude financials; the WisdomTree Ex-Financials Dividend Fund (DTN) has left all-inclusive ETFs such as SPY in its dust (the gap in YTD performance is about 900 basis points). Similarly, the International Dividend Ex-Financials Fund (DOO) is well ahead of broad-based EAFE products such as EFA (though both are in negative territory so far in 2011).

This actually makes me feel pretty good about the markets; if we strip out one abysmal sector, performances have actually been pretty solid.

6. Europe’s Unexpected Big Loser

Europe has been in the headlines throughout the year–for all the wrong reasons. It isn’t the least bit surprising that European equity ETFs have struggled this year; just about every fund focusing on this region has been dragged down by the ongoing debt concerns. I was expecting the products focusing on Italy (EWI) or Spain (EWP)–markets in the middle of the chaos–to be leading the descent on the year. But the worst performer in the Europe Equities ETFdb Category is actually the iShares MSCI Austria Index Fund (EWO), which has lost close to 35% of its value since the year began [see What's Crushing The Austria ETF?].

5. Utilities: Boring, But Effective

If financials have been the biggest drag on portfolios in 2011, the biggest boost to many has come from a rather unlikely corner of the market: utilities stocks have thrived so far this year. The popular Utilities SPDR (XLU) finished November up almost 16%, and several other similar products–including VPU and IDU–were not far behind.

This strong performance, combined with the struggles from the financials sector–helps to validate the theory behind the ALPS Equal Weight Sector ETF (EQL); by allocating equivalent weightings to each of the nine major sectors, EQL is positioned to participate in rallies in corners of the market that are underweighted in traditional cap-weighted indexes. EQL has outperformed SPY by about 80 basis points on the year.

4. Alternative Energy Bloodbath

There are a few corners of the ETF universe that really taken it on the chin in 2011, and the funds that make up the Alternative Equities ETFdb Category have been leading the way lower. The best performer in the category has lost about 15% on the year, while the worst (solar power fund KWT) is down a whopping 60%. 

Alternative energy stocks, once considered a “can’t miss” investment, have flopped this year in large part as a result of Europe’s fiscal woes. Cash-strapped governments have been forced to slash subsidies on which these young companies rely, forcing some out of business altogether.

3. Opportunity In India?

After an impressive stretch that saw emerging markets race ahead of their developed counterparts, this asset class has come back down to earth in 2011. Though long-term growth prospects are exceptionally strong, short term issues such as inflation have popped up to derail the rally.

Some of the biggest decliners in the Emerging Markets ETFdb Category in 2011 are two ETFs that focus on small cap stocks in India, SCIF and SCIN. Both of these have tumbled by about 40% on the year, considerably larger declines than large cap-focused India ETFs such as EPI and INP.

For bargain hunters, these funds might be worth a closer look. India is expected to become one of the largest economies in the world by 2050, and the small cap stocks that make up these ETFs arguably have the greatest growth potential.

2. Head-To-Head Discrepancies

It’s always interesting to see how exchange-traded products linked to the same index or asset class perform. Most “head-to-head” matchups, such as EEM/VWO, IVV/SPY, and IAU/GLD are neck and neck through 11 months of the year. Others have a little more distance between two similar products that are distinguished by details such as structure, replication strategy, or expenses.

One relatively big gap is between the two ETPs linked to the Alerian MLP Infrastructure ETF. The ETF, AMLP, is up a respectable 4.1%, But that comes in far behind the UBS ETRACS Alerian MLP Infrastructure Index; MLPI, an ETN linked to the same index, has popped by about 9.4% year-to-date.

This discrepancy arises from nuances related to the structure of these products; AMLP must accrue a tax liability as the underlying securities appreciate, while MLPI doesn’t face that requirement. In fairness to AMLP, these figures don’t necessarily tell the whole story; the distributions made by the ETF–which are significant–may get an advantageous tax treatment, which boosts after tax returns actually pocketed by investors. Still, this gap goes to show that details such as product structure can be rather important.

1. Natural Gas Freefall Continues

To this point, 2011 has been a relatively good year for the ETPs that make up the Oil & Gas ETFdb Category–with a few noteworthy exceptions. The three ETPs linked to natural gas, UNG, UNL, and GAZ, have all lost about 30% or more so far on the year as prices for the widely used fuel have remained weak amidst steady growth in demand. The United States Brent Oil Fund (BNO) is up more than 20% on the year, and the popular USO is hovering around break-even.

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Disclosure: No positions at time of writing.