10 Best Performing ETFs Year To Date

November 05, 2014

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.

1. Long-Dated Treasury ETFs

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.


3. India-Focused Equity ETFs

There are four India-focused equity funds on our top-performers list, including small-cap strategies that own the companies said to be most in tune with domestic themes.

They are:

The Indian stock market has been on a tear this year, fueled largely by a reformist government, and growth-friendly policies promoted by Reserve Bank of India Governor Raghuram Rajan.

Nouriel Roubini, one of the world's most respected macroeconomists, recently told ETF.com he expects this outperformance of emerging markets such as India—relative to developed economies—to continue next year.

“As you know, valuations were a bit depressed in emerging markets,” he said. “If you have more reformist government coming to power in countries from Indonesia to India to other emerging markets, then economic growth in the end could improve, and policymaking could improve as they start to pursue some of the right macro and structural policies.”

4. Coffee-Related ETNs

Coffee-focused ETPs iPath Dow Jones-UBS Coffee Total Return ETN (JO | B-67) and the iPath Pure Beta Coffee ETN (CAFE | B-98) have been making headlines throughout the year thanks to surging coffee prices in the face of dwindling supplies.

JO is up 64 percent year-to-date, and CAFE is up 60 percent.

Behind the price move—and the performance of these ETPs—is a drought so severe in Brazil that the coffee crop has not only been hindered this year, it is expected to fall short of expectations in 2015 as well.

According to some estimates, Brazil’s drought in the southern region is its worst in some 80 years. Brazil is the largest coffee producer in the world.

Both JO and CAFE invest in coffee futures, but JO tracks a single, front-month coffee futures contract, while CAFE tracks an index of a single coffee futures contract whose expiration date is chosen to mitigate contango. That difference explains the small dispersion in their performance.


5. The single-best-performing exchange-traded product is the Elements Linked to Spectrum Large Cap U.S. Momentum ETN (EEH)

This ETN, which tracks an index of large-cap U.S. stocks aiming to outperform the S&P 500 through a momentum strategy, tops the list of year-to-date best performers. But this isn’t exactly a reflection of a strong strategy rallying on solid fundamentals.

EEH is actually a tiny ETN—as in $1.5 million—that barely traded so far all year, and one that lacks much oversight. This year, it saw a spike in volume that was enough to push it into a huge premium over fair value. EEH is now up nearly 140 percent year-to-date.

As Dave Nadig, chief investment officer of ETF.com, recently pointed out in a blog in which he called EEH the worst ETF in the world, “Big premiums on small ETFs with no liquidity aren’t that uncommon.”

What’s happening, he says, is that the action seen in EEH is most likely the result of HFT algos designed to “look for patterns and pounce on anything that moves.”

“My guess is that HFT algos don’t even recognize that EEH is an ETF, or that a thing such as fair value even exists,” he said. “Miniscule, million-dollar ETNs like EEH are enormously susceptible to this.”

Top 10 Performers (Ex Leveraged & Inverse)

Ticker Fund Asset Class YTD TRR AUM ($M)
EEH ELEMENTS Linked to SPECTRUM Large Cap U.S. Momentum ETN U.S. Equity 139.31 1.84
JO iPath Dow Jones-UBS Coffee Total Return ETN Commodities 64.84 81.4
CAFE iPath Pure Beta Coffee ETN Commodities 60.2 7.78
SMIN iShares MSCI India Small-Cap Int. Equity 45.29 16.07
SCIF Market Vectors India Small-Cap Int. Equity 41.32 265.72
FBT First Trust NYSE Arca Biotechnology U.S. Equity 41.2 1,747.58
SCIN EGShares India Small Cap Int. Equity 40.17 27.97
INCO EGShares India Consumer Int. Equity 39.04 10.91
ZROZ PIMCO 25+ Year Zero Coupon U.S. Treasury U.S. Fixed Income 34.45 78.47
PBE PowerShares Dynamic Biotech & Genome U.S. Equity 34.06 421.6
As of 10/29/14

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