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Trade Cautiously: These ETFs Might Play a Prank on You
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Though the stock market has made an impressive comeback this year from the huge slump seen in the fourth quarter, bouts of volatility and uncertainty persist. Investors should not be fooled by the false rise or fall in stock prices. This is especially true as many ETFs that have been performing well ín the year-to-date period may not continue their trend for the whole of this year and vice versa.
Let’s find out some of the gems in the ETF world and see whether they are bluffing investors or not.
Oil/Energy ETFs
After feeble trading at the end of last year, oil price made a nice comeback on OPEC-led fresh crude output cuts and falling output from Iran and Venezuela due to U.S. sanctions. Additionally, the Fed’s dovish outlook, which pushed the U.S. dollar down, led to a spike in oil price. Notably, a weak dollar made dollar-denominated assets cheap for foreign investors, potentially raising demand for commodities. Notably, oil price registered its biggest increase in nearly a decade in the first quarter.
As a result, the ultra-popular United States Oil Fund (USO - Free Report) , which tracks the price of U.S. light crude, rose 29.4% so far this year while SPDR S&P Oil & Gas Equipment & Services ETF (XES - Free Report) topped the list of the best-performing energy ETFs of the first quarter, surging nearly 28.4%.
However, fears of global slowdown and lingering uncertainty surrounding the US-China trade deal continued to dampen the outlook for oil demand. Trump’s repeated tweet to boost oil output is also a major overhang on oil price. The president issued the second warning last week that OPEC members should start pumping more oil given the increase in crude prices. Given this, the solid run-up in oil and energy ETFs might fool investors’ going forward and a cautious approach should be taken while trading in this space. Notably, both USO and PSCE are down 4.5% and 20.1%, respectively, over the past year (read: Make the Most of the Oil Rush With These ETFs).
Small Cap ETFs
Small-caps stocks, as represented by the Russell 2000 Index, outperformed the S&P 500 with gains of 14.2% in Q1. This is especially true as investors are seeking shelter in these stocks that have less international exposure and generate most of their revenues from the domestic market. These pint-sized stocks are less vulnerable to trade war or any other political issues and could better insulate investors against global headwinds. As such, iShares Morningstar Small-Cap Growth ETF gained nearly 20%, followed by gains of 17% for iShares Russell 2000 Growth ETF (IWO - Free Report) and Vanguard Russell 2000 Growth ETF (VTWG - Free Report) each.
The outperformance might not last given the slew of downbeat economic data lately, especially on the manufacturing and job fronts. Additionally, if volatility flares up, small caps could be terrible performers as huge gains and losses can occur in a very short period of time.
China ETFs
The Chinese stock market has been on fire this year with ETFs targeting this country outperforming the global stock world. Hopes of a U.S.-China trade deal, stimulus and a wide range of reforms implemented by the government to revitalize its economic growth are acting as key catalysts. The MSCI’s move to increase weightings of China stocks on its indices has instilled further confidence. Moreover, depressed valuations have also encouraged investors to charge up at lower levels (read: Top ETF Stories of Q1).
VanEck Vectors China SME-ChiNext ETF (CNXT), Xtrackers Harvest CSI 500 China A-Shares Small Cap ETF (ASHS - Free Report) and Reality Shares Nasdaq NexGen Economy China ETF are leading the rally. However, slowing growth in the economy as indicated by the round of last month’s data poses a risk to the ETFs. If U.S.-China don’t strike a trade deal, then it could lead to sell-offs in Chinese stocks.
Gold ETFs
Gold ETFs have gained some shine from a dovish Fed that has raised the appeal for the bullion. This is because lower interest rates will continue to weigh on the dollar against the basket of currencies, raising the yellow metal’s attractiveness as it does not pay interest like fixed-income assets. Additionally, global headwinds will continue to boost demand for the metal as a great store of value and hedge against market turmoil. GraniteShares Gold Trust (BAR - Free Report) , iShares Gold Trust (IAU - Free Report) , Aberdeen Standard Physical Swiss Gold Shares ETF (SGOL - Free Report) and SPDR Gold MiniShares Trust (GLDM - Free Report) gained at least 0.70% so far this year.
The positive trend seems be reversing with the bullion posting its worst month since August 2018, diminishing the luster of the metal. The progress in trade talks between the two largest economies seems to end the year-long tit-for-tat tariffs war and this move is negative for gold as investors will rotate out into more risky assets (read: Can Gold ETFs Continue to Shine in 2019?).
Zero or Negative Fee ETFs
The race to low cost ETFs now has reached new levels with Salt Financial filing for the negative fee ETF, namely, Salt Low truBeta US Market ETF LSLT. This fund will pay investors $5 for every $10,000 invested, taking its expense ratio to -0.05%. But there is a twist in this filing. The fee has been temporarily waived till April 2020 or till the fund crosses the $100 million level, whichever comes earlier. After that, LSLT will charge investors 29 bps, which is higher than many other products with similar type of investment (read: Forget Free, This ETF Will Pay You to Invest.
In February, online lender SoFi had filed for industry’s first zero-fee ETFs - SoFi 500 ETF (SFY - Free Report) and the SoFi Next 500 ETF SFYX. SoFi has made a couple of ETFs free to investors and provided fee waiver in the first year. However, after that, expense ratio of 0.19% will be levied. This annual fees is much higher than many other products in the same industry.
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Trade Cautiously: These ETFs Might Play a Prank on You
Though the stock market has made an impressive comeback this year from the huge slump seen in the fourth quarter, bouts of volatility and uncertainty persist. Investors should not be fooled by the false rise or fall in stock prices. This is especially true as many ETFs that have been performing well ín the year-to-date period may not continue their trend for the whole of this year and vice versa.
Let’s find out some of the gems in the ETF world and see whether they are bluffing investors or not.
Oil/Energy ETFs
After feeble trading at the end of last year, oil price made a nice comeback on OPEC-led fresh crude output cuts and falling output from Iran and Venezuela due to U.S. sanctions. Additionally, the Fed’s dovish outlook, which pushed the U.S. dollar down, led to a spike in oil price. Notably, a weak dollar made dollar-denominated assets cheap for foreign investors, potentially raising demand for commodities. Notably, oil price registered its biggest increase in nearly a decade in the first quarter.
As a result, the ultra-popular United States Oil Fund (USO - Free Report) , which tracks the price of U.S. light crude, rose 29.4% so far this year while SPDR S&P Oil & Gas Equipment & Services ETF (XES - Free Report) topped the list of the best-performing energy ETFs of the first quarter, surging nearly 28.4%.
However, fears of global slowdown and lingering uncertainty surrounding the US-China trade deal continued to dampen the outlook for oil demand. Trump’s repeated tweet to boost oil output is also a major overhang on oil price. The president issued the second warning last week that OPEC members should start pumping more oil given the increase in crude prices. Given this, the solid run-up in oil and energy ETFs might fool investors’ going forward and a cautious approach should be taken while trading in this space. Notably, both USO and PSCE are down 4.5% and 20.1%, respectively, over the past year (read: Make the Most of the Oil Rush With These ETFs).
Small Cap ETFs
Small-caps stocks, as represented by the Russell 2000 Index, outperformed the S&P 500 with gains of 14.2% in Q1. This is especially true as investors are seeking shelter in these stocks that have less international exposure and generate most of their revenues from the domestic market. These pint-sized stocks are less vulnerable to trade war or any other political issues and could better insulate investors against global headwinds. As such, iShares Morningstar Small-Cap Growth ETF gained nearly 20%, followed by gains of 17% for iShares Russell 2000 Growth ETF (IWO - Free Report) and Vanguard Russell 2000 Growth ETF (VTWG - Free Report) each.
The outperformance might not last given the slew of downbeat economic data lately, especially on the manufacturing and job fronts. Additionally, if volatility flares up, small caps could be terrible performers as huge gains and losses can occur in a very short period of time.
China ETFs
The Chinese stock market has been on fire this year with ETFs targeting this country outperforming the global stock world. Hopes of a U.S.-China trade deal, stimulus and a wide range of reforms implemented by the government to revitalize its economic growth are acting as key catalysts. The MSCI’s move to increase weightings of China stocks on its indices has instilled further confidence. Moreover, depressed valuations have also encouraged investors to charge up at lower levels (read: Top ETF Stories of Q1).
VanEck Vectors China SME-ChiNext ETF (CNXT), Xtrackers Harvest CSI 500 China A-Shares Small Cap ETF (ASHS - Free Report) and Reality Shares Nasdaq NexGen Economy China ETF are leading the rally. However, slowing growth in the economy as indicated by the round of last month’s data poses a risk to the ETFs. If U.S.-China don’t strike a trade deal, then it could lead to sell-offs in Chinese stocks.
Gold ETFs
Gold ETFs have gained some shine from a dovish Fed that has raised the appeal for the bullion. This is because lower interest rates will continue to weigh on the dollar against the basket of currencies, raising the yellow metal’s attractiveness as it does not pay interest like fixed-income assets. Additionally, global headwinds will continue to boost demand for the metal as a great store of value and hedge against market turmoil. GraniteShares Gold Trust (BAR - Free Report) , iShares Gold Trust (IAU - Free Report) , Aberdeen Standard Physical Swiss Gold Shares ETF (SGOL - Free Report) and SPDR Gold MiniShares Trust (GLDM - Free Report) gained at least 0.70% so far this year.
The positive trend seems be reversing with the bullion posting its worst month since August 2018, diminishing the luster of the metal. The progress in trade talks between the two largest economies seems to end the year-long tit-for-tat tariffs war and this move is negative for gold as investors will rotate out into more risky assets (read: Can Gold ETFs Continue to Shine in 2019?).
Zero or Negative Fee ETFs
The race to low cost ETFs now has reached new levels with Salt Financial filing for the negative fee ETF, namely, Salt Low truBeta US Market ETF LSLT. This fund will pay investors $5 for every $10,000 invested, taking its expense ratio to -0.05%. But there is a twist in this filing. The fee has been temporarily waived till April 2020 or till the fund crosses the $100 million level, whichever comes earlier. After that, LSLT will charge investors 29 bps, which is higher than many other products with similar type of investment (read: Forget Free, This ETF Will Pay You to Invest.
In February, online lender SoFi had filed for industry’s first zero-fee ETFs - SoFi 500 ETF (SFY - Free Report) and the SoFi Next 500 ETF SFYX. SoFi has made a couple of ETFs free to investors and provided fee waiver in the first year. However, after that, expense ratio of 0.19% will be levied. This annual fees is much higher than many other products in the same industry.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>