Three Years Later: Best Performing ETFs Since Markets Bottomed Out

by on March 13, 2012 | ETFs Mentioned:

For many investors, March 9, 2009 was a major turning point; on that day the Dow Jones Industrial Average closed below 6,550, capping a disastrous stretch that had erased billions of dollars from portfolios around the world. Fortunately, that proved to be the low point of the recent recession; the next day markets rallied, and continued to move generally higher throughout the end of the year.

So it should be no surprise that most ETFs offering exposure to risky asset classes now boast impressive three year return figures; most are well into positive territory, and many have more than doubled over the past 36 months or so. What is perhaps surprising is the list of the best performers in the three years following the depths of the recession; some of the ETFs that have delivered the most impressive returns over this period are not household names, and cover asset classes that might not have been expected to climb quite so high: 

10. Global X Colombia ETF (GXG): Up 209%

This ETF offers exposure to Colombian stocks, holding a portfolio of about 20 stocks from the South American country. Colombia has been the star of Latin America for the past several years, delivering significantly better returns than Brazil or any other country in the region. Once viewed as a gangland for drug wars, Colombia has seen its economy flourish thanks to campaigns to weed out narcotics and corruption, and legislation designed to encourage international investment and fuel domestic consumption [see LatAm-Centric ETFdb Portfolio].

9. WisdomTree SmallCap Earnings ETF (EES): Up 211%

This ETF is one of several that offers exposure to small cap U.S. stocks, an asset class that can exhibit significant volatility. What makes EES unique is the methodology behind the underlying index; the WisdomTree Small Cap Earnings Index is a fundamentally weighted benchmark that includes small cap stocks that have reported positive cumulative earnings over the past four quarters. The index is earnings weighted, meaning that the companies with the largest reported earnings get the biggest allocation.

8. First Trust Consumer Discretionary AlphaDEX (FXD): Up 219%

This ETF is one of several that allows investors to tap into consumer discretionary stocks, a cyclical segment of the market that has potential to exhibit big swings in both directions. Because the underlying companies sell items that are often viewed as luxuries, demand can strengthen considerably at the beginning of a recovery.

FXD utilizes the AlphaDEX methodology that underlies a number of First Trust ETFs; this “enhanced” indexing strategy involves applying a quantitative model to identify consumer discretionary stocks that are deemed to have the greatest potential for capital appreciation [see AlphaDEX ETFdb Portfolio]. In this case, the approach was quite successful at generating alpha; though FXD is a bit more expensive than XLY, it has more than justified the additional fees by delivering significantly higher returns than the cap-weighted consumer discretionary ETF.

7. Retail SPDR (XRT): Up 240%

This ETF offers exposure to a targeted sub-sector of the consumer discretionary space, focusing on stocks that maintain retail operations in the U.S. Though targeted in that sense, XRT includes a number of different types of retail stores: apparel, automotive retail, food retail, internet retail, general merchandise, and drug retail [see XRT Holdings].

6. Rydex Equal Weight Consumer Discretionary (RCD): 241%

Consumer discretionary funds have reserved a big portion on this list, and RCD is an ETF from Rydex that has the same holdings as XLY but gives an equal allocation to each. That results in a heavier allocation to small cap stocks, a bias that has served RCD quite well during the recovery [see also Equal Weighted ETFdb Portfolio].

5. Rydex S&P MidCap 400 Pure Value ETF (RFV): Up 248%

This ETF might be a bit of a surprise as one of the best performers over the last three years, as RFV focuses not on a red hot emerging market but on a rather “plain vanilla” asset class: mid cap U.S. stocks. As shown below, the last three years have been an ideal environment for the “pure style” ETFs offered by Rydex; the portfolios focusing on the securities that exhibit the strongest value characteristics have outperformed their peers by a wide margin [see The Truth About Alternative Weighting Methodologies].

Many value ETFs maintain rather broad portfolios, excluding a small number of stocks that exhibit strong growth characteristics instead of focusing on the true value stocks. RFV utilizes a much more strict definition of “value stock”, and therefore has a much smaller portfolio than funds such as the iShares S&P MidCap 400 Value Index Fund (IJJ). The “pure value” difference has been significant recently, as shown by RFV’s stellar performance.

4. iShares MSCI Thailand Index Fund (THD): Up 267%

The emerging markets of Asia have been one of the most compelling stories in recent years, establishing themselves as the primary contributors to GDP growth and attracting a growing amount of interest from investors around the globe. Though economies such as China and India have been impressive, it is the smaller and lesser-known markets that have delivered the best returns.

THD maintains a portfolio of about 85 different stocks, and has a meaningful tilt towards financials (32%) and energy (26%). Thailand makes up only about 2% of the MSCI Emerging Markets Index, meaning that ETFs such as EEM and VWO have almost no allocation to this country.

3. Rydex S&P 500 Pure Value ETF (RPV): Up 291%

Similar to RFV, this ETF utilizes the “pure value” approach to segmenting the large cap U.S. stock market; RPV holds the components of the S&P 500 Index that exhibit the strongest value characteristics. And this methodology also translated into a significant advantage among larger companies; RPV outpaced ETFs that implement similar techniques by a wide margin over the last three years [see Talking ETF Weighting Methodologies With Tony Davidow].

2. Rydex S&P SmallCap 600 Pure Value (RZV): 291%

Completing the trifecta for the pure value suite of ETFs is RZV, which targets the value stocks from the universe of small cap U.S. stocks. Once again, the difference between this ETFs and other peers in the Small Cap Value ETFdb Category is significant; RZV delivered returns that come close to doubling many products that appear to maintain very similar investment objectives [see RZV Realtime Rating].

1. Market Vectors Indonesia ETF (IDX): Up 313%

The biggest winner over the past three years from the ETF universe is Indonesia, an emerging Asian economy that has thrived thanks to a strong relationship with China, a rapidly growing middle class, and a surge in interest from international investors [see Asia-Centric ETFdb Portfolio].

IDX is one of two ETFs to offer exposure to Indonesia, having been recently joined by a competing iShares ETF (EIDO). Unfortunately, this economy receives a very small weight in many portfolios; Indonesian stocks make up less than 3% of the MSCI Emerging Markets Index.

Disclosure: Unfortunately, no positions at time of writing (or at any point over the last three years).