Smart-beta exchange-traded funds continued to gain in popularity in 2015. The unconventional ETFs, which aim to deliver outperformance while shunning traditional market-cap-weighting indexs, were a hit with investors.
In fact, the WisdomTree Europe Hedged Equity ETF (HEDJ | B-49), a currency-hedged product with a tilt toward exporters, was far and away the inflows leader this year, with investors adding nearly $15 billion to the fund. The No. 2 position belonged to another currency-hedged fund, the Deutsche X-trackers MSCI EAFE Hedged Equity ETF (DBEF | B-71), with inflows of more than $12 billion.
In terms of performance, these "smart beta" funds delivered. Year-to-date gains were 5.7% for HEDJ and 2.7% for DBEF through Dec. 18. That's better than the returns of their plain-vanilla counterparts such as the market-cap-weighted iShares MSCI EMU (EZU | A-83) and the iShares MSCI EAFE (EFA | A-93), both of which had single-digit losses for the year.
However, despite their solid performance, HEDJ and DBEF weren't among the very-best-performing smart-beta ETFs this year. To crack the top 10, an ETF needed a return of about 10%, an exceptional gain in a year in which the S&P 500 and the MSCI World Index struggled to stay flat.
Biotech ETF Leads Pack
Taking the No. 1 spot with ease was the ALPS Medical Breakthroughs ETF (SBIO | D-58), with a 27.8% return through Dec. 18. In a year in which the broader health care sector only delivered a 4.6% return, SBIO's performance was stellar.
The fund, with $168 million in assets, offers a unique twist on the biotech space by holding shares of companies that have at least one drug in either phase II or phase III of FDA clinical trials. SBIO also targets small- to medium-sized companies with market caps between $200 million and $5 billion, and limits itself to those that have enough cash on hand to fund themselves for at least two years.
SBIO's high-risk/high-reward strategy delivered in 2015, but it remains to be seen whether the ETF―which launched at the very end of last year―can continue to outperform.
Aside from SBIO, there was one other health care ETF to make the top 10: the PowerShares Dynamic Pharmaceuticals ETF (PJP | B-61), which advanced 10.5%.
PJP weights its holdings based on various fundamental and risk factors, which tilts the fund more toward smaller-sized stocks than the industry benchmark.