They say the best perfumes come in the smallest bottles. Perhaps that holds true in ETFs, too—at least when it comes to short-term performance.
Investors poured more than $200 billion into U.S.-listed ETFs in the first five months of the year, bringing total U.S. ETF assets to almost $3 trillion. The most popular fund this year, the iShares Core S&P 500 ETF (IVV), attracted some $14 billion in net inflows.
But the top 10 best-performing ETFs this year command only about $1.42 billion in total combined assets. Their net creations between January and May 2017 reached only $458.5 million split across 10 different funds.
And yet their year-to-date results stand out among the 2,000-plus ETFs listed in the U.S. today.
Story Lines Behind Performance
Behind these funds’ impressive performances so far this year are a few different story lines: historically low volatility in the U.S. stock market; a mind-boggling rally in bitcoin prices; a forging recovery in emerging markets; and across-the-board strength in the tech sector.
Leading with gains of more than 53% in five months is a complex volatility ETN, the VelocityShares VIX Short Volatility Hedged ETN (XIVH). The strategy—which includes both a large short exposure to near-term VIX futures and a small long and leveraged position—is built to benefit from contango in CBOE Volatility Index (VIX) futures. In other words, it gains most when the VIX is going down.
By the end of May, VIX was trading just below 10—far off its 52-week high of 26.7, according to CBOE data, and it’s been below 10 at close of trading several times in the month of May alone. Volatility has been declining, making it the perfect setting for XIVH to flourish.
Another big story this year fueling a pair of ETFs has been bitcoin.
The Securities and Exchange Commission decision earlier this year to deny permission for bitcoin ETFs to come to market only helped further fuel the bitcoin space. In the first five months of the year, bitcoin prices surged nearly 150%.
Those bitcoin gains are largely the reason two very small ARK Invest funds are among the top-performing ETFs of the year. Bitcoin—owned through allocations to the Grayscale Bitcoin Trust (GBTC)—is the ARK Innovation ETF (ARKK) and the ARK Web x.0 ETF (ARKW)’s biggest single holding, at about 8% and 8.2%, respectively.
Both funds also own names like Tesla, Amazon and Athena Health—all companies that have been delivering strong returns this year.
These ETFs are actively managed funds said to benefit from their portfolio managers’ strong “conviction” when it comes to owning specific stocks. They have on occasion bought into stocks that they believe in for the long haul even when they might seem out of favor in the near term—value plays that sometimes work wonders.
Emerging Markets Surging
Six of the 10 best performers are all linked to emerging markets. The region is coming off of four years of underperformance relative to developed-market equities, forging a bottom and gaining some ground. A weaker U.S. dollar, too, has helped in recent months, as have lower, attractive valuations relative to developed-market equities.
Leading the bunch with gains of roughly 41% is the Emerging Markets Internet & Ecommerce ETF (EMQQ), which owns internet-related companies in almost 20 countries. The ETF is one of the year’s best tech funds, too, thanks to its sharp focus on the internet of things.
EMQQ’s performance is also linked to China, a country that represents nearly two-thirds of its portfolio.
The performance of China-focused ETFs hasn’t been that good this year, with different types of stocks—H-Shares (Hong Kong listed), N-Shares and A-Shares (mainland listed)—behaving differently. But strong earnings growth in some segments, particularly tech, has boded well for funds such as EMQQ. Companies like Tencent and Alibaba have been soaring.
Chinese & Indian Funds Gain
That scenario has also pushed the KraneShares CSI China Internet ETF (KWEB) to the top 10 list. The fund owns exclusively U.S.-listed Chinese software and IT services companies, and it’s up 39% in five months. KWEB is also the most popular fund among the year’s best performers, with inflows of some $186 million.
Technology has been the strongest sector in the S&P 500 so far this year, and it’s also a sector that’s standing out globally. Five of the best-performing ETFs in 2017 are directly linked to tech stocks.
Finally, there’s India.
India-linked ETFs, benefiting from the country’s strong GDP growth (above 7%), its pro-business leadership and positive demographic trends, have also done well. The VanEck Vectors India Small-Cap ETF (SCIF) and the iShares MSCI India Small Cap ETF (SMIN) are among the year’s best returns.
Net Flows ($,M)
|% of AUM||May 2017 Net
|XIVH||VelocityShares VIX Short Volatility Hedged ETN||UBS||53.21||0.06||53.45||0.11%||0.00|
|ARKK||ARK Innovation ETF||ARK||43.99||23.62||42.11||56.09%||19.07|
|ARKW||ARK Web x.0 ETF||ARK||42.42||15.99||40.19||39.79%||11.73|
|EMQQ||Emerging Markets Internet & Ecommerce ETF||Exchange Traded Concepts||40.98||60.49||100.17||60.39%||47.91|
|SCIF||VanEck Vectors India Small-Cap Index ETF||VanEck||38.97||74.20||316.31||23.46%||37.61|
|KWEB||KraneShares CSI China Internet ETF||KraneShares||38.89||186.21||481.47||38.68%||121.99|
|GAMR||PureFunds Video Game Tech ETF||ETF Managers Group||35.79||5.88||16.18||36.34%||5.88|
|PGJ||PowerShares Golden Dragon China Portfolio||Invesco PowerShares||35.40||3.55||177.27||2.00%||11.49|
|CXSE||WisdomTree China ex-State-Owned Enterprises Fund||WisdomTree||35.36||0.00||9.66||0.00%||0.00|
|SMIN||iShares MSCI India Small Cap ETF||BlackRock||35.10||88.61||184.04||48.15%||40.27|
Contact Cinthia Murphy at [email protected]
What are your biggest concerns for the second half of 2017?
I’m most concerned about tax reform in the U.S. The market has gone up on the tail wind of expectations that tax reform would relax consumers and help corporations, but I’m not sure we’re going to see tax reform in 2017. The market isn’t pricing in a delay in tax reform, and if we get a delay, can we even get it done at all with midterm elections next year? I’m not so sure. If it doesn’t happen, market risk rises.
Just about every year in the past 30 years, we’ve seen the market pull back some 5% at some point, and we haven’t yet seen that type of action this year. We could see a correction in the coming months, and a pickup in volatility due to the uncertain future of tax reform. That makes me apprehensive about U.S. equities going forward.
We’re going to be pivoting toward international stocks, adding Europe, U.K., Japan and Australia as a relative value play. We’ve owned emerging market equities since late last year due to attractive valuations already. We see some opportunity in the international space, but the reality is, this has been a nice year for equity returns, and there’s nothing that’s truly cheap right now.
Once we get some volatility back, we might see some opportunities pop up for some tactical moves. Otherwise, we tend to think more strategically.