Top Performing ETFs Of All Time

What does it take to be the top-performing ETF of all time? Hint: a good amount of leverage, a basket of tech stocks and a little bit of luck.

It's not a question that gets asked a lot. After all, why does it matter what the top-performing ETF of all time is? As the ubiquitous fund disclaimer notes, "past performance is no guarantee of future results."

So it might not matter, but it's still an interesting question. It's one I asked Eric Balchunas, senior ETF analyst and funds product specialist at Bloomberg. He told me what the top performer was, along with the next 14 ETFs with the best returns of all time.

They are:

Source: Bloomberg

Data measures the period from inception through Oct. 24, 2017

Leveraged Tech ETFs Sizzle

Easily taking the top spot is the Direxion Daily Technology Bull 3x Shares (TECL), which has a 3,260% return since its inception in 2008.

TECL provides aggressive, leveraged exposure to a group that has done exceedingly well over the past decade―large-cap tech stocks. As the Apples, Microsofts and Googles of the world have surged higher, TECL followed suit.

TECL isn't the only leveraged tech ETF on the all-time list. The ProShares UltraPro QQQ (TQQQ), which provides 3x exposure to the tech-heavy Nasdaq-100 index, and the Direxion Daily Semiconductor Bull 3x Shares (SOXL), which provides triple-leveraged exposure to semiconductor stocks, have rallied 2,203% and 1,330%, respectively, since their launches.

Compounding Effect

"Tech has had a nice path up," said Balchunas. "That's the key for leverage; if you have a nice climb up with very low volatility, that's what I call a 'full moon.' That's when the compounding effect kicks in and those leveraged ETFs will give you four or five times the index, not just two or three," he explained.

Balchunas contrasted that with what normally happens to leveraged ETFs. Usually, "the volatility drag makes you get less than two or three times over longer time periods," Balchunas noted.

Along with tech, leveraged ETFs tied to other strong-performing sectors made the cut. The Direxion Daily MSCI Real Estate Bull 3x Shares (DRN) and the Direxion Daily Retail Bull 3x Shares (RETL) and the Direxion Daily Healthcare Bull 3x Shares (CURE) all have lifetime gains in excess of 800%.

Even leveraged ETFs tied to broad market indices―like the ProShares UltraPro S&P500 (UPRO) and the Direxion Daily Mid Cap Bull 3x Shares (MIDU)―were beneficiaries of the compounding effect that Balchunas talked about.

Timing Is Everything
But it isn't enough to simply have leverage and track an index with strong returns and low volatility. All of the funds on the list also have the advantage of another key factor: timing.

Many of these funds were launched at or near market bottoms. TECL came to market in December 2008, after the stock market plunge associated with the financial crisis was already in full swing; UPRO began trading in June 2009, only three months after the absolute low of the bear market; and CURE launched in June 2011, when the eurozone sovereign debt crisis was raging.

"With ETF launches, timing is everything―in both an asset-gathering sense and a performance sense," Balchunas said.

Shorting The VIX

Eleven of the 15 names on the all-time list are leveraged products, but that still leaves four that aren't. The ProShares Short VIX Short-Term Futures ETF (SVXY) and the VelocityShares Daily Inverse VIX Short-term ETN (XIV) are two of those, with lifetime returns of 1,893% and 992%, respectively.

SVXY launched almost a year after XIV, which was a better time to establish a short position on the CBOE Volatility Index (VIX). Both products more than doubled this year alone as volatility has dropped to shockingly low levels.

If you strip out the leveraged products, SVXY and XIV are at the top of the heap. If you go further and strip out the inverse products too, that leaves you with just two ETFs.

SPY Makes The List

One of those exchange-traded funds, believe it or not, is the most famous ETF of all, the SPDR S&P 500 ETF Trust (SPY). Launched on Jan. 22, 1993, SPY has risen 828.3% since its inception. The other is a close cousin, the SPDR S&P Midcap 400 ETF Trust (MDY), with a 1,131% gain since its launch in 1995.

These two funds are on the all-time list in large part thanks to their age.

"MDY and SPY are up there simply because they're old," said Balchunas. "They've been around since the '90s, and longevity really helps with returns, especially if it's an equity ETF."

He also added that "it's nice to see midcaps get attention because everyone forgets about them" and that "once you erase the leveraged and inverse ETFs, MDY is No. 1."

Power Tools

One curious observation about the ETFs on the all-time list is that most of them aren't very popular. With the obvious exception of SPY and MDY, the other 13 products on the list have assets under management ranging from $36 million to $2 billion.

Should investors be taking a closer look at these red-hot ETFs?

According to Balchunas, the answer is no: "These are power tools. You could argue that the fact that they don't have a lot of assets is a good thing and it shows that highly dangerous ETFs are largely isolated to the trading community."

Balchunas says that if you bought any of these products now, they could go in the opposite direction in a hurry: "These are the ETFs your mother warned you about.”

"Those leveraged ETFs probably won't be at the top long. The whole list minus MDY and SPY is very fragile, but it's fun to look at," he concluded.

Contact Sumit Roy at [email protected]