Rain makes for lush agricultural crops, and for parched ag ETF returns.
The worst-performing exchange-traded product so far in 2017 has felt the pinch of what’s been abundant rain in key growing areas in the U.S. and abroad.
The DB Agriculture Long ETN (AGF)—which tracks an index of six agricultural commodity futures contracts including corn, wheat, soybeans and sugar—is down roughly 58% in 2017. AGF is a small strategy, having only $1.4 million in total assets, and it isn’t the only commodity strategy to land on the list of 10 worst-performing funds year-to-date.
The ETRACS UBS Bloomberg CMCI Industrial Metals Total Return ETN (UBM), offering exposure to copper, aluminum, zinc, lead and nickel; and the Credit Suisse X-Links Commodity Rotation ETN (CSCR), which tracks an equal-weighted basket of eight commodities with the highest backwardation/least contango, are also among the bottom performers.
Slow Flows To Commodity ETFs
As an asset class, commodities have not done all that well this year, and have attracted little in the form of assets in five months. Net inflows into commodity ETFs have totaled only $618 million between January and May.
Ongoing weakness in the energy sector tied to dropping oil prices in the face of increased U.S. production is also overhanging commodity funds that allocate heavily to energy. Among them is the PowerShares S&P SmallCap Energy Portfolio (PSCE), which owns energy stocks found in the S&P Small-Cap 600 Index.
PSCE essentially taps into two segments of the market that have suffered in 2017: energy and small-cap stocks. The fund plunged 31.5% in the first five months of the year, dropping to levels not seen since early 2016.
Lackluster Volatility Returns
Outside of commodities and energy, volatility was another big theme among the biggest losers. Five of the 10 worst-performing funds are all linked to volatility. All these strategies are designed to gain when CBOE Volatility Index (VIX) futures rise—something it hasn’t done this year.
Instead, the VIX has dropped, and dropped dramatically, trading below 10 for several days in May alone—a level that is considered very rare from a historical perspective. Markets have been quiet, and strategies designed to make big single-day moves of the VIX have suffered.
The actively managed REX VolMaxx Long VIX Weekly Futures Strategy ETF (VMAX) is second on the list, with losses of 57.5% so far in 2017. VMAX offers exposure to VIX futures with less than 30 days to expiration.
The ETF isn’t designed to reflect the VIX index. It’s a tactical tool that’s designed to benefit from “negative correlation between the VIX index and equity markets,” according to the issuer, REX. This year, the strategy hasn’t worked so well.
These two strategies command more than $1 billion in combined assets under management, and are each down more than 48% so far in 2017.
|Ticker||Fund||YTD 2017 Total Return||YTD 2017 Net Flows ($,M)||2017 AUM ($,M)||% of AUM||May 2017 Net Flows ($,M)|
|AGF||DB Agriculture Long ETN||-57.96||-0.24||1.44||-16.67%||0.00|
|VMAX||REX VolMAXX Long VIX Weekly Futures Strategy ETF||-57.51||2.17||2.88||75.29%||1.54|
|GAZ||iPath Bloomberg Natural Gas Subindex Total Return ETN||-49.34||-0.01||3.51||-0.28%||-0.02|
|VIXY||ProShares VIX Short-Term Futures ETF||-48.21||69.33||149.04||46.52%||28.07|
|VIIX||VelocityShares Daily Long VIX Short-Term ETN||-48.19||10.34||13.23||78.18%||0.00|
|VXX||iPath S&P 500 VIX Short-Term Futures ETN||-48.12||370.68||963.21||38.48%||78.40|
|UBM||ETRACS UBS Bloomberg CMCI Industrial Metals Total Return ETN||-41.60||0.00||2.42||0.00%||0.00|
|CSCR||Credit Suisse X-Links Commodity Rotation ETN||-35.49||-0.03||1.01||-2.98%||-0.01|
|PSCE||PowerShares S&P SmallCap Energy Portfolio||-31.55||-25.45||36.10||-70.51%||-5.06|
|VIIZ||VelocityShares VIX Medium Term ETN||-30.99||0.80||1.17||68.13%||-0.21|
Note: (Leveraged and inverse ETFs were not included in the data).
Contact Cinthia Murphy at [email protected]
What are your biggest concerns for the second half of 2017?
Domestically, we believe there are three key factors that will drive markets in the second half of 2017:
- Earnings Growth: We would like to see a follow-through of positive earnings growth into the second half of the year to validate the bull market in equities and current valuations.
- Economic Growth: GDP disappointed in the first quarter, and if it continues to disappoint, we could see this acting as a head wind to both corporate earnings and wage growth, which are desperately needed by the U.S. consumer.
- Federal Reserve: While it may force through one or two more rate hikes, we don’t believe it will get the economic growth necessary to begin reducing its balance sheet, as it recently indicated was a possibility in the second half of 2017. Without meaningful economic growth, further tightening will likely invert the yield curve, and dramatically increase the probability of a recession in the U.S.
Uncertainty abounds. Equities are trading well above historical average valuations and near all-time highs. Interest rates remain mired near historic lows, and economic growth stubbornly refuses to accelerate.
Investors should proceed with caution, but remain invested and well diversified. We will look to overweight alternative investment strategies that have low correlations to stocks and bonds, while also demonstrating an ability to protect on the downside.
We will also look to equity and income strategies that have the flexibility to adapt their exposures and minimize downside risk, such as the QuantX Risk Managed Growth ETF (QXGG) and the QuantX Risk Managed Multi-Asset Income ETF (QXMI).