Top Performing ETFs Of 2016

The best way to describe 2016 for investors is that it was a year of surprises, including these:

• The U.S. stock market had its worst start to the year ever, plunging 8% in its first 10 trading sessions and more than 11% in its first 20.
• Crude oil prices tumbled to a 13-year low of $26/barrel in January, and doubled in the next several months.
• Negative interest rates became pervasive, accounting for more than $13 trillion worth of bonds around the world at one point.
• The benchmark 10-year U.S. Treasury rate fell to a record-low 1.32% in July and doubled during the next five months.
• The U.K. voted to leave the eurozone, and "Brexit" had essentially no negative impact on the global economy or stocks.
• Donald Trump won the U.S. presidential election and ignited a furious stock market rally.

In a year full of surprises―many of them perceived to be negative, by conventional wisdom―no one would have imagined that the S&P 500 would be where it is, up more than 13% for the year.

Perhaps that's the biggest surprise of all.

Emerging Markets & Commodities Comeback

In spite of all of the unexpected events, 2016 became a breakout year for equities. It's a year in which the seven-year bull market in U.S. stocks resumed after pausing for several months due to concerns about China and an "earnings recession" for U.S. corporations.

But it wasn't just U.S. stocks that rallied. Emerging market equities made a comeback, with the MSCI Emerging Markets Index climbing almost 10% on the year. The same can be said about commodities; the S&P GSCI Spot Index jumped 26% this year.

As it turns out, ETFs tied to emerging markets and commodities ended up being the best-performing funds of the year. Each of the top 10 ETFs of 2016 targeted either emerging market equities or commodity-related equities.

Returns for this group of nonleveraged/noninverse funds ranged from 58% to 122% in the year-to-date period through Dec. 21.

That's impressive, but it must be put in context. For the past few years, emerging market and commodity stocks were decimated on the back of the China slowdown and other factors. Every fund on 2016's top 10 list was down in 2015 and 2014. With the exception of two, they were all down in 2013 as well.

Thus, while 2016 may have marked the bottom for emerging market and commodity ETFs, most aren't anywhere near their all-time highs.

Silver Miners ETF Take No. 1 Spot

The title of best-performing ETF of 2016 goes to the PureFunds ISE Junior Silver ETF (SILJ), with its 121.7% gain. SILJ was up even more―as much as 280% at its highs―but the recent sell-off in silver and gold prices took a bite out of returns for miners.

YTD Return For SILJ

Silver prices were last trading near $16/oz after hitting $21 at one point in July. Still, they're up from where they started the year around $14. Likewise, gold last traded at $1,130, down from a high of $1,375, but up from $1,050 at the start of the year.

SILJ, with almost $50 million in assets, holds stocks of small-cap silver mining companies, the riskiest segment of the already-risky precious metals mining industry. In addition to SILJ, the broader Global X Silver Miners ETF (SIL) also made the top 10, with a 67.1% return.

Metals & Mining ETF Gains Steam After Election

In contrast to SILJ, which has been losing steam recently, the No. 2 ETF of 2016, the SPDR S&P Metals & Mining ETF (XME), has been gaining steam into year-end. XME was last trading up 114.5% year-to-date, with half of those gains coming since the Nov. 8 U.S. presidential election.

YTD Return For XME

President-elect Trump's promise of massive infrastructure spending and trade policies that protect U.S. manufacturers―including steel producers―has been a boon for XME, which primarily holds steel companies, integrated miners and some coal stocks.

It's the same reason the VanEck Vectors Steel ETF (SLX) is the fourth-best-performing ETF of the year, with a 103.1% gain; and the Global X Copper Miners ETF (COPX) is the seventh-best-performing ETF, with a 75.1% return.

Of course, Trump isn't the only, or even biggest, reason ETFs like XME, SLX and COPX surged this year. Production cuts and rising demand in China for steel, coal and other basic materials played a big part in the recovery.

One ETF in particular that benefited from the developments in China this year was the VanEck Vectors Coal ETF (KOL). This is a fund that surged all year long as China slashed output of coal to boost prices and prop up indebted Chinese coal miners. As of Dec. 21, KOL was up 100% on the year.

Emerging Market Winners

Rounding out the top 10 list were three other ETFs, including the PowerShares S&P SmallCap Materials Portfolio (PSCM). PSCM has large holdings of small-cap stocks in the chemicals, steel and paper industries. Small-cap stocks in general took off like a rocket after the election; for example, PSCM was up close to 20% year-to-date before Nov. 8. Yesterday, it was up 58%.

Meanwhile, two single-country emerging market ETFs also made the top 10 list. The VanEck Vectors Russia Small-Cap ETF (RSXJ) spiked 103.6% this year, while the ProShares MSCI All Peru Capped ETF (EPU) gained 61.4%.

Peru, a large producer of copper, and Russia, a large producer of oil and natural gas, benefited from the recovery in their respective commodities, and the rebound in emerging markets more broadly. Russian stocks also got a boost from the U.S. election amid speculation that a Trump administration could offer sanctions relief for the country.

For a full list of this year's top ETFs, see the table below:

Table excludes leveraged/inverse products, and measures total return in the year-to-date period through Dec. 21.

Contact Sumit Roy at [email protected]