So far in 2014, India, coffee, biotech and long-dated Treasurys have been good to investors.
There are a myriad themes coursing through our tally of the 10 best-performing ETFs year-to-date. So far, 2014 has been a good year for funds tapping into an emerging market such as India, or for those linked to a drought-ravaged commodity market such as coffee.
It has also been a stellar year for U.S. Treasury bond funds, particularly those investing in longer-dated debt, as well as for strategies that own equities in one of the in-vogue segments within health care: biotech.
There’s indeed a lot of outsized performance to note in this list, which we are breaking down in five groups detailed below in ascending order of performance.
There are several reasons long-dated debt has come back into vogue this year. The downward trend in 10- and 30-year Treasury yields reflect expectations that the Federal Reserve will take its time to increase rates even in this post-QE environment. That’s because the U.S. economic recovery is far from robust, the inflation outlook remains tame, and the European Central Bank and Bank of Japan continue to be highly accommodative.
These factors have boded well for long-dated debt, so it’s unsurprising to see a fund like the PIMCO 25+ Year Zero Coupon U.S. Treasury Index ETF (ZROZ | B-57) show up in our tally of 10 best-performing ETFs so far this year.
In some ways, ZROZ is a “super-charged duration play,” to quote Howard Lee, ETF analyst at ETF.com. The fund tracks an index of long-term Treasurys with coupon cash flows removed, leaving only the principal repayment at the end. These securities—called STRIPS—are sold at discount to face value and make no interest payments until they mature at par.
Since STRIPs are zero-coupon bonds, they are particularly sensitive to interest-rate risk, according to ETF.com Analytics.
There’s no question that duration remains one of the key drivers in the performance of fixed-income ETFs this year. For ZROZ, that has equated to gains of 34.45 percent year-to-date.
2. Biotech ETFs
Health care is the best-performing sector in the S&P 500 right now, having rallied more than 21.5 percent year-to-date, inching above utilities in recent weeks. But within that sector, what’s really shining are biotech companies, partially thanks to an Ebola outbreak that is fueling demand for new solutions.
“The story in ‘health care’ isn’t about ‘health care’ at all—it’s about biotech—companies out there on the bleeding edge of medical science,” Nadig said in a recent blog. “And biotech ETFs have had a wild, wild ride this year.”
It’s unsurprising, then, to see two biotech ETFs on the best-performers list. The First Trust Biotech ETF (FBT | B-25) is particularly notable due to an established track record as “a perennial performance winner” in the segment, regularly capturing alpha through its equal-weighted methodology. The fund is up more than 41 percent year-to-date.
By design, FBT offers more exposure to smaller biotech companies than market-cap competitors, and some of its holdings have been rallying sharply this year.
The PowerShares Dynamic Biotech & Genome ETF (PBE | B-23), meanwhile, clocks in as the No. 10 best-performing ETF year-to-date, with gains of about 34 percent. The difference in performance from competing FBT comes down to methodology.
PBE uses a multifactor model to pick stocks in the biotech and genetic engineering fields in a strategy that ends up including more “peripheral” segments such as pharmaceuticals and specialty chemicals into the mix. In fact, biotech names represent roughly 40 percent of the mix. The portfolio has a tiered equal-weighting methodology.