Best & Worst Smart Beta ETFs

August 06, 2015

Energy Drops Across The Board

Far and away the worst-performing ETF was the First Trust ISE-Revere Natural Gas Fund (FCG | A-99) with a 38 percent loss. The fund is the only exchange-traded product that offers access to predominantly natural gas equities, and it does so using an equal-weighting scheme. Unfortunately, with natural gas prices in the tank amid oversupply concerns, the underlying stocks have been hammered, making FCG a standout loser.

Other smart-beta energy ETF laggards include the PowerShares DB Oil (DBO | B-88), which tracks crude oil futures while optimizing contracts to minimize contango; the First Trust Energy AlphaDex (FXN | B-54), which uses a proprietary quant-based approach to weight its energy stock holdings; and the PowerShares Dynamic Oil & Gas Services ETF (PXJ | C-20), which uses a multifactor approach to select which oil services stocks to hold.

None of these smart-beta strategies did much to staunch the bleeding due to oil prices. The optimized DBO, for example, performed just as poorly as the vanilla United States Oil Fund (USO | B-100).

At the same time, FXN performed much worse than the broad-based Energy Select SPDR (XLE | A-95) and PXJ significantly underperformed the cap-weighted Market Vectors Oil Services ETF (OIH | A-47). Much of the underperformance in the smart-beta products can be tied to the fact that they are tilted toward smaller companies, which tend to underperform in a down market.

Miners & Brazil Share Hit Hard

Outside of energy, the big loser in 2015 so far was gold miners. And out of that dreary bunch, the Sprott Gold Miners ETF (SGDM | B-71) was the poorest performer. Unlike the Market Vectors Gold Miners ETF (GDX | C-77), which ranks its holdings based on market cap, SGDM selects them based on their beta against spot gold prices. That makes the portfolio even more volatile than the already-volatile sector benchmark.

SGDM lost 27.7 percent through the first seven months of the year compared with 25.2 percent for GDX.

One standout on the list that isn't directly linked to commodities, but nonetheless is heavily impacted by them, is the First Trust Brazil AlphaDex (FBZ | F-79). Brazil is, of course, one of the largest commodity producers in the world, supplying significant volumes of coffee, oil, iron ore and more.

While that was good for FBZ during the commodities boom, it's been all bad news during the current bust. The ETF, which uses a proprietary methodology to weight its holdings, has underperformed the cap-weighted behemoth in the Brazil space, the iShares MSCI Brazil Capped ETF (EWZ | B-95) with a loss of 23.1 percent compared with EWZ's 20.1 percent.

Ticker Fund YTD Return (%)
as of 7/31/15
FCG First Trust ISE-Revere Natural Gas -38.04
SGDM Sprott Gold Miners -27.73
ENY Guggenheim Canadian Energy Income -25.11
DBO PowerShares DB Oil -23.06
FBZ First Trust Brazil AlphaDex -23.05
JJS iPath Bloomberg Softs Subindex Total Return ETN -23.36
YMLP Yorkville High Income MLP -21.73
FXN First Trust Energy AlphaDex -18.40
PXJ PowerShares Dynamic Oil & Gas Services -18.17
RJN ELEMENTS Rogers International Commodity - Energy Total Return ETN -17.29

Contact Sumit Roy at [email protected].

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