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.
Japan Funds Dominate
It's been a good year for Japanese stocks. The broad market in the country, as measured by the iShares MSCI Japan ETF (EWJ | B-98), gained 8% in 2015 thanks to powerful monetary stimulus from the Bank of Japan, including the purchases of bonds, stocks and ETFs.
But as well as EWJ has performed, a number of smart-beta ETFs tied to the country have done even better. A total of four such ETFs made this top 10 list, including the WisdomTree Japan SmallCap Dividend ETF (DFJ | B-95) and the WisdomTree Japan Hedged SmallCap Equity ETF (DXJS | C-67), with gains of more than 16%.
Instead of focusing on market cap, DFJ ranks its holdings based on dividends. Meanwhile, DXJS is essentially the currency-hedged version of DFJ. The fund neutralizes its foreign currency exposure by shorting the yen.
The other two Japan ETFs to make the list are the iShares MSCI Japan Minimum Volatility ETF (JPMV | B-80) and the SPDR MSCI Japan Quality Mix ETF (QJPN | C-91), up 13.8% and 10.7% for the year, respectively.
Like its name implies, JPMV chooses its holdings to minimize the volatility of the fund. Meanwhile, QJPN takes it a step further by choosing its holdings based on three factors: low volatility, value and quality.
Other Smart-Beta Outperformers
Rounding out the top 10 were an eclectic group of funds. The PowerShares KBW Property & Casualty Insurance ETF (KBWP | B-62) rose by 12.7%, while the PowerShares DWA Consumer Staples Momentum ETF (PSL | B-64) added 12.3%.
Finally, the WisdomTree International Hedged Quality Dividend Growth ETF (IHDG | B-47) advanced 10.4%, while the WisdomTree Europe SmallCap Dividend ETF (DFE | C-79) returned almost 10%.
2015 Top 10 Smart-Beta ETFs
Returns through Dec. 18, 2015
Contact Sumit Roy at [email protected].