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Top ETF Stories of First Quarter

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The first quarter of 2021 has been bestowed with upbeat news like the rollout of the $1.9 trillion of fiscal support from the Biden administration, growing distribution of vaccines and the starting of the economic reopening. However, the quarter has also faced some concerns while closing out as COVID-cases have started rising globally.

Rising rate worries and fears of a tax rate hike in the United States also dampened investors’ sentiments in March. The benchmark U.S. treasury yield went up to 1.73% on Mar 29, 2021 from 0.93% at the start of the year. Overall, the S&P 500 Index, the Dow Jones, the Nasdaq and the Russell 2000 gained about 6.2%, 9%, 1.5% and 12.1%, respectively, in the quarter (as of Mar 30, 2021).

Let’s take a look at the key ETF events of Q1.

Reddit Frenzy

The first quarter of 2021 will be long remembered for the Reddit mania. In January, the world's largest video game retailer — GameStop (GME - Free Report) — became one of the most-heavily traded stocks this year as Reddit’s WallStreetBets forum decided to bet on it. There was an epic rally of more than 1,700% in the stock mid-month. After that, Reddit’s WallStreetBets forum decided to bet on silver and then marijuana stocks too.

Cannabis on a High

The cannabis companies have received a boost from the Biden’s Democratic Party’s intentions to legalize the plant at the federal level. Additionally, deal activities as well as the Reddit frenzy have strengthened the bullish case for these stocks. Shares of major cannabis stocks have rallied this year massively (read: Marijuana ETFs on a High on Reddit Frenzy).

Amplify Seymour Cannabis ETF (CNBS - Free Report) (up 53.6%), Global X Cannabis ETF(POTX) (up 50.1%) and The Spinnaker ETF Series Cannabis ETF (THCX) (up 47.1%) were the winners.

Bitcoin’s Stellar Run

The price of Bitcoin has been soaring lately. It crossed the $60,000-mark for the first time this quarter. Bitcoin has soared about 100% this year driven by institutional interest (read: Bitcoin at Record $60K: Which Way ETFs are Headed?). 

Corporations’ increased acceptance in allowing customers to hold bitcoin and other virtual coins in their online wallets and several central banks’ intention of rolling out digital currencies have been favoring the cryptocurrency (read: Will Fidelity's Bitcoin ETF See the Light of Day?).

Since investors cannot lay their hands on a bitcoin ETF now, they familiarized themselves with the concept through blockchain ETFs like Amplify Transformational Data Sharing ETF (BLOK - Free Report) . BLOK added 52.4% in the past three months. Notably, the blockchain technology in bitcoin keeps track of the balances for all users and updates them on each transaction.

Oil Price Rally

Oil prices made a comeback recently, buoyed by the continuation of the OPEC output cut and economic improvement globally. Vaccine and U.S. fiscal stimulus optimism have also led to the rally. United States Oil Fund LP (USO - Free Report) and United States Brent Oil Fund LP (BNO) gained about 27.9% and 28.6%, respectively, in Q1. Dynamic Energy Exploration & Production Invesco (PXE - Free Report) (up 49.4%) and Unconventional Oil & Gas Vaneck ETF (FRAK) (up 45.3%) are the two winners.

Value Investing Beat Growth

Rising rates are good for value stocks than growth ones as the latter’s cash flows come way out in the future. On the other hand, value stock investing is not done with such a long-term view as indicated by New York University finance professor Aswath Damodaran, as quoted on CNBC. Plus, reopening of economies has favored the beaten down value stocks of 2020 this year. S&P Smallcap 600 Pure Value Invesco ETF (RZV - Free Report) (up 29.6%) and iShares Focused Value Factor ETF (FOVL) (up 25.1%) have been two great winners.

Banks Bounce Back but Close the Quarter on Archegos Crisis Tension

A steepening yield curve, undervaluation, decent earnings growth potential and Fed's decision to okay shareholder value maximization if stress test is cleared are some of the factors that made bank ETFs well positioned. Nasdaq Bank ETF First Trust (FTXO - Free Report) (up 28.9%) and KBW Regional Banking Invesco ETF (KBWR) (up 26.9%) have gained materially this year (read: 4 Sector ETFs to Watch for Gains in Q2).

With the Fed being dovish and economic improvements boosting long-term yields, the yield curve has steepened this year. The biggest winner of the steepening yield curve is the financial sector. As banks seek to borrow money at short-term rates and lend at long-term rates, banks earn more on lending and pay less on deposits amid steepening yield curve, thereby leading to a wider spread. This expands net margins and increase banks’ profits.

However, hedge fund Archegos’ default on margin call put bank stocks in an edgy spot in late March. There was a fire sale of stocks that included U.S. and Chinese companies listed in the United States. The failure to bring in additional margins forced banks including Nomura to Credit Suisse to liquidate the holdings of Archegos. Both banks already indicated considerable losses from a U.S. client in Q1.

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