By Chief Investment Officer, Chuck Self on December 9, 2015
This year has been another strong one for the ETF industry. Their popularity continued to grow among investors and advisors, with more than $2.1 trillion in assets as of Oct. 31, an 11.4% increase over the previous 12 months, according to the Investment Company Institute.
Naturally, there were winners and losers. This year, fund results were largely driven by global economic conditions and commodity supply and demand. Following are 2015’s biggest hits and misses.
3 Strong Performers
ETF results were strong overseas in key economic regions including Russia and Japan. Growth was anchored by Internet-based ETFs with strong near- and long-term growth prospects.
This area saw growth ranging from 18-20% this year. Japanese exporters have been hurt by slowing global economic growth. However, most of the country’s small-cap companies draw revenue from domestic sources, and easing from the Bank of Japan is benefiting these companies.
Top picks in the sector include the WisdomTree Japan SmallCap Dividend Fund (DFJ | B-95)and the WisdomTree Japan Hedged SmallCap Equity Fund (DXJS | C-67). Despite 2015 growth, investors should be cautious in the region next year, because any positive economic news is already priced into stocks.
This area is up nearly 25% this year. Internet companies have strong earnings visibility and will benefit from dynamic growth among existing products, platforms and technology, as well as the acceleration of new products and services.
Top picks in the sector are the First Trust DJ Internet Index Fund (FDN | A-60), thePowerShares Nasdaq Internet Fund (PNQI | B-61) and the KraneShares CSI China Internet ETF (KWEB | C-24). Internet ETFs are a good buy well into 2016 due to expected strong near- and long-term growth.
This area is up nearly 20% on the year. The ruble, and oil—which accounts for 40% of the Russian economy—stabilized, and Russian stocks remained inexpensive. Russia continues to show signs of a strengthening relationship with Western countries, which most notably could result in lifted economic sanctions sooner rather than later.
Top picks in this sector include the Market Vector Russia ETF Trust (RSX | B-70), the SPDR S&P Russia ETF (RBL | F-72) and the iShares MSCI Russia Capped ETF (ERUS | C-93). Looking ahead into 2016, supply and demand for oil will become more balanced, making Russian equities a solid investment.
3 Sectors That Missed
Several sectors underperformed this year as a result of specific economic conditions, which are likely to persist into 2016.
Natural Gas ETFs
This area was down 45-70% this year on strong production in the shale fields, which drove inventory to five-year highs. Demand for natural gas will remain low amid a forecasted mild winter for the U.S. Natural gas should continue to be avoided, as supply and demand concerns will not be resolved anytime soon.
This area was down 40-50% in 2015 to its lowest levels in 12 years, hurting ETFs based on this commodity’s prices. Nickel’s primary use is in making stainless steel. Demand for this material isn’t likely to rise anytime soon, because of slowed economic growth. Strong nickel production will continue to put pressure on prices in 2016.
The iPath Bloomberg Nickel Subindex Total Return ETN (JJN | F-93) has reflected the metal’s poor performance.
This area also made the list of the year’s worst performers. The country’s recession is deepening due to a strong reliance on commodity prices. Also, the Brazilian real was down 60% this year at its lows, due to political instability and credit downgrades. However, the real has rebounded 10% in recent months, which provides a bit of hope for investors. If the Brazilian government takes positive political action to attract capital and commodity prices stabilize, Brazilian stocks will become attractive into next year.
The iShares MSCI Brazil Capped (EWZ | B-96) tracks a market-cap-weighted index of Brazilian firms covering the entire market-cap spectrum. The Market Vectors Brazil Small-Cap (BRF | F-52) tracks a market-cap-weighted index of Brazilian small-cap firms.
ETFs remain a solid option for investors looking to own low-cost assets exposed to different areas of the global market. There will be a continuation of strong asset growth in these funds in 2016 and beyond.
While taking advantage of their positive attributes, advisors are wise to keep a finger on the pulse of the global economy next year, particularly as geopolitical unrest and the U.S. presidential election impact ETF results.
Chuck Self, MBA, CFA, is chief investment officer and chief operating officer at iSectors, an outsourced investment manager that provides advisors access to their proprietary asset allocation models based on low-cost index ETFs designed with various risk tolerances. He has more than 30 years of experience in the investment management industry. At the time of this writing, neither the author nor the firm held any positions in the securities mentioned.