Surprising ETF Losers Of 2016

These three popular slices of the ETF universe are faring poorly this year.

sumit
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Senior ETF Analyst
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Reviewed by: Sumit Roy
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Edited by: Sumit Roy
Last week, renewed economic jitters pushed the S&P 500 briefly into the red for the year. The stock index has since bounced back a bit, and currently has a year-to-date total return in the 2.5% range.

Certain parts of the market—such as energy and utilities—have done even better, handily outperforming the S&P 500. On the other hand, a few notable areas have done much worse than the broader market.

These are some of the surprising losers of 2016 year-to-date:

Biotechnology

The worst-performing non-leveraged/non-inverse ETF in 2016 so far is a biotech fund, the BioShares Biotechnology Clinical Trials Fund (BBC), which lost 37.3% year-to-date through May 10.

It's not the only one. From the ALPS Medical Breakthroughs ETF (SBIO) with a 29.8% loss, to the iShares Nasdaq Biotechnology ETF (IBB | A-67) with a 22.4% loss, there's a plethora of biotech ETFs deeply in the red this year. What’s going on?

YTD Returns For BBC, SBIO, IBB

One reason for the sell-off may be political uncertainty. Presidential candidates Hillary Clinton and Donald Trump have both promised to bring drug prices down if they are elected to office.

Clinton went as far as to blame the pharmaceutical and biotechnology industries for price gouging, and said she would speed up the approval of generic drugs to combat high prices.

Meanwhile, high-profile cases of drug price inflation by the likes of Valeant Pharmaceuticals and Turing Pharmaceuticals have only added to the negative perception of the industry.

Yet despite these head winds, some investors believe the long-term future for biotechs remains bright.

“Health care and biotech continue to be high-probability, long-term, successful growth sectors, [and] smart investors take advantage of these downdrafts by adding to their positions,” Steve Janachowski, president and chief executive of Brouwer & Janachowski, recently told the Wall Street Journal.

Indeed, biotech ETFs remain popular for investors. The aforementioned IBB saw $100 million in inflows so far this year, according to FactSet data, and now has $6 billion in total assets. It's also done remarkably well over longer-term time horizons, returning 113% over the past five years.

China

One of the biggest financial news stories of 2015 was the bursting of China's stock market bubble. Though the bleeding has slowed, the stock market in China continues to struggle this year.

The VanEck Vectors ChinaAMC SME-ChiNext ETF (CNXT | D-55) shed 23.6% year-to-date. Other China ETFs such as the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR | D-65), down 17.3%, and the iShares China Large-Cap ETF (FXI | B-42), down 8.8%, are also lagging.

YTD Returns For CNXT, ASHR, FXI

The most obvious concern for China investors is the slowing economy. GDP growth edged further under 7% this year as the country continues to transition away from a manufacturing-based economy and toward a consumption-based model.

But that may not be the only problem. Some investors, such as hedge fund manager Kyle Bass, believe that China may be on the brink of a credit crisis larger than even the U.S. subprime crisis of 2007 to 2009.

"Chinese banks will lose approximately $3.5 trillion of equity if China's banking system loses 10 percent of assets," Bass wrote earlier this year. "China will likely have to print in excess of $10 trillion worth of yuan to recapitalize its banking system. By the time the loss cycle has peaked, we believe the [yuan] will have depreciated in excess of 30 percent versus the U.S. dollar."

If Bass is right, the losses in China ETFs could get much worse. On the other hand, some investors are more optimistic, and see a scenario in which the Chinese government successfully orchestrates a "soft land" for the economy.

Japan

Along with China, another Asian heavyweight is doing poorly this year: Japan. ETFs such as the WisdomTree Japan Hedged Equity Fund (DXJ | B-63) and the iShares Currency Hedged MSCI Japan ETF (HEWJ | D-37) have fallen notably in 2016.

DXJ is down 13.5% year-to-date and HEWJ is down 11.8%.

Japan currency-hedged funds have performed the worst, despite an ongoing monetary policy there designed to weaken the yen, which hasn’t been happening as expected. Vanilla Japan ETFs, like the iShares MSCI Japan ETF (EWJ | B-95), are faring much better thanks to the appreciation of the yen versus the U.S. dollar. EWJ is down a much more modest 2.6%.

YTD Returns For DXJ, HEWJ, EWJ

For Japan, investors may finally be throwing in the towel after three years of Abenomics failed to deliver the economic growth that many had hoped for. In 2015, Japan's economy grew a disappointing half a percent despite massive amounts of stimulus from the Bank of Japan.

The recent new paradigm of negative interest rates in the country may also be hurting sentiment. Additionally, the rise in the yen hurts Japanese exporters, which make up a big chunk of the country's stock market.

Contact Sumit Roy at [email protected].

Sumit Roy is the senior ETF analyst for etf.com, where he has worked for 13 years. He creates a variety of content for the platform, including news articles, analysis pieces, videos and podcasts.

Before joining etf.com, Sumit was the managing editor and commodities analyst for Hard Assets Investor. In those roles, he was responsible for most of the operations of HAI, a website dedicated to education about commodities investing.

Though he still closely follows the commodities beat, Sumit covers a much broader assortment of topics for etf.com, with a particular focus on stock and bond exchange-traded funds.

He is the host of etf.com’s Talk ETFs, a popular video series that features weekly interviews with thought leaders in the ETF industry. Sumit is also co-host of Exchange Traded Fridays, etf.com’s weekly podcast series.

He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing chess and snowboarding in Lake Tahoe.