Top Performing ETFs For 1Q 2017

By any measure, 2017 has so far been good year for investors. Out of the nearly 2,000 ETFs listed on U.S. exchanges, more than 80% were up on a year-to-date basis through March 28. Gainers have come from all segments of the market, but it's equities that have done the best.

Equities Lead The Pack

U.S. stocks, as measured by the SPDR S&P 500 (SPY), returned 5.7% during Q1. Many analysts called the move a "Trump rally" due to the promise of business-friendly economic policies from the new administration, including tax cuts, deregulation and infrastructure spending.

But the good fortune during the quarter wasn't limited to just U.S. stocks. International developed-market equities, as measured by the Vanguard FTSE Developed Markets ETF (VEA), climbed 8.4%; and emerging markets, as measured by the Vanguard FTSE Emerging Markets ETF (VWO), rallied 12.5%, thanks to an improving global economic backdrop.

Even fixed-income ETFs participated in this year's gains, despite an early rate hike from the Federal Reserve in March. The iShares 20+ Year Treasury Bond ETF (TLT) added 1.7%; the iShares JP Morgan USD Emerging Markets Bond ETF (EMB) gained 4%; the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) returned 1.7%; the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) rose by 1%; and the iShares Core U.S. Aggregate Bond ETF (AGG) edged up by 0.7%.

On the other hand, commodities were notable laggards during the first quarter, losing 5.4% in the period, based on the PowerShares DB Commodity Index Tracking Fund (DBC). Gold prices performed well―the SPDR Gold Trust (GLD) jumped 8.6% in the year-to-date period―but that wasn't enough to offset the 9.7% drop in crude oil, which has the greatest weighting in most broad commodity indices.

Inverse VIX Products Surge

As well as they've performed, none of the ETFs mentioned thus far are among the highest-returning ETFs this year. For the 15 ETFs on the list, gains ranged from 22% to 63%. That's especially impressive considering that leveraged exchange-traded products were excluded.

At the top of the heap were inverse VIX products―ETFs that rise when the CBOE Volatility Index declines. There were a total of five such products in the top 15.

The irony is that, heading into 2017, investors were bracing for high volatility given the uncertainty that a Trump presidency brought. Instead, the stock market has been unusually calm, with share prices rising steadily throughout most of the first quarter.

The VIX dropped from 14 at the end of last year to 11.5 currently. That's been a boon for ETFs like the REX VolMaxx Short VIX Weekly Futures Strategy ETF (VMIN), up 62.8% year-to-date, and the VelocityShares Daily Inverse VIX Short-Term ETN (XIV), up 59.1% year-to-date.

In addition to the drop in the underlying index, steep contango for VIX futures has further aided returns for these products that short VIX futures contracts to get their inverse exposure.

Sentiment On Emerging Markets Improves

The next group of ETFs that have done particularly well this year are those targeting emerging markets. As mentioned earlier, the broad VWO gained a handsome 12.5% in Q1, while some ETFs that target single countries have performed even better.

In most cases, rising local currencies boosted the returns for these funds. But that wasn't the whole story. Sentiment on emerging markets improved markedly from last year, when investors fretted about whether China was on course for a hard landing; whether a 1997-style financial crisis was brewing in the region; and whether Trump's trade policies would prove detrimental for emerging economies.

During the first quarter of this year, those concerns were no longer on the forefront of investors' minds. Moreover, in some cases, it wasn't just a lack of bad news, but actual good news that boosted equities.

Single-Country Emerging Market Winners

Indian stocks got a shot in the arm after a landslide win for Indian Prime Minister Modi's political party in state elections earlier in March raised expectations that the business-friendly leader will have an easier time enacting his economic reforms.

Small-cap India stock ETFs were among Q1's best performers. Gains for the Columbia India Small Cap ETF (SCIN), the VanEck Vectors India Small-Cap Index ETF (SCIF) and the iShares MSCI India Small Cap ETF (SMIN) ranged from 26% to 30%.

Meanwhile in Brazil, another reform-minded leader, President Michel Temer, also helped fuel sizzling gains in the stock market. The VanEck Vectors Brazil Small-Cap ETF (BRF) and the iShares MSCI Brazil Small-Cap ETF (EWZS) rose more than 22% apiece on the back of hopes that Temer can revive growth in Brazil's battered economy following the worst recession in the country's history.

Another emerging market ETF to make the top-performers list was the iShares MSCI Poland Capped ETF (EPOL), with a gain of 22.9%. Poland's GDP may grow by 3.2% this year, according to economists, up from a 2.8% growth rate in 2016.

The Global X China Materials ETF (CHIM), the KraneShares CSI China Internet ETF (KWEB) and the Emerging Markets Internet & Ecommerce ETF (EMQQ) also made the cut, with returns of more than 22% each.

For a full list of the 15 top-performing ETFs of Q1, see the table below:

Note: Data is for the year-to-date period through March 28 and excludes leveraged ETFs.

Contact Sumit Roy at [email protected]