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May ETF Winners and Losers: Consumer Funds Rise, Volatility Sinks

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The well-known trading adage, "sell in May and go away" didn’t work for the U.S. markets at least for the month of May. Though the U.S. markets looked clueless for the first half of May, they nevertheless managed to close in the green for the fourth month in a row.

Pickup in economic activity after a dull first quarter and easing tensions between Ukraine and Russia led the markets to clock new highs in May. The S&P 500 and the Dow ended the month at record high levels.

While the Dow gained 0.8%, the S&P 500 rose 2.1% in May. Technology shares took a breather this month with the Nasdaq closing 3.1% higher, marking the first monthly gain in three months (read: Beat the Market with Fundamentally Strong ETFs).

Though the index rose to new highs last month, market volume and breadth was pretty low with fewer stocks touching new highs. Only 20 out of the 500 companies in the S&P 500 index managed to hit new 52-week highs on May 23 – the day when the index hit an all-time high, according to a BusinessWeek article. The figure is the lowest in a year, suggesting lack of strength.

Mixed signals prevailed, which kind of prevented the bears from getting fierce and at the same time kept the bulls in check. Though the unusually harsh winter pushed the GDP growth for the first quarter in to negative territory – the first time in three years – recent improving trends in the U.S. economy led the bulls to believe that growth will strengthen going forward.

Amid the tug of war, equities ruled for the month of May, unlike April in which commodities reigned supreme. However, gains were quite modest this time for equities ETFs. Below we have highlighted some of the best and the worst performing ETFs for the month.

Best ETFs

First Trust Consumer Staples AlphaDEX Fund (FXG) - Up 6.9%

Though the equity markets rose to new highs last month, lackluster economic data led nervous investors to take shelter in the defensive consumer staples sector. Sub-par macro earnings picture coupled with macro challenges led this fund to be the best performer in the last month (see all Consumer Staples ETF here).

FXG tracks the StrataQuant Consumer Staples Index, giving investors exposure to a basket of 38 stocks. The fund is quite popular in the space with an asset base of $968.2 million, which ensures ample liquidity for investors. The product primarily holds food products stocks, though Beverages and Food & Staples Retailing also have double-digit allocations.

iShares U.S. Healthcare Providers ETF (IHF) - Up 6.3%

Thanks to Obamacare, an increase in healthcare spending has been beneficial to the above ETF, which recorded 6.2% gains in the past month. Newly insured Americans have started utilizing medical facilities like doctor visits and hospital services, drugs and nursing homes after gaining coverage via subsidized public exchanges, thus pushing up spending on health care.

The fund follows the Dow Jones U.S. Select Health Care Providers Index, giving investors exposure to the U.S. health care providers managing an asset base of $469.2 million. The product has amassed $469.2 million in its asset base and trades in moderate volume of less than 40,000 shares per day. It charges 48 bps in fees per year from investors (read: ETF Sector Rotation: Industrials Out, Healthcare In).

Columbia Large Cap Growth ETF (RPX) -Up 6.3%

The fund also had a favorable month as investors shifted to large cap stocks from mid and small cap stocks. Large cap stocks tend to be the most stable in uncertain times.

Though that might be the case, the fund’s top holding, Apple (5.72% weighting) also seems to be a factor for the fund outperforming the broader markets last month. The stock has been hitting new highs after its dividend and buyback plans were announced. Moreover, the stock has also seen analyst price target hikes ahead of its iPhone 6 launch.

The fund tracks the Russell 1000 Growth Index, seeking long-term capital appreciation. However, the product is the most unpopular ETF in the large cap growth equities ETF space managing a small asset base of $2 million. It trades in light volume of an average of 1500 shares a day.

ETF Losers

Volatility ETFs, linked to the CBOE Volatility Index or the VIX, were the biggest losers in the month of May as investors seemed confident of a recovering economy going forward (read: Volatility ETFs Crash Signaling Further Volatility?)

VIX tends to outperform when markets are falling or fear levels over the future are high, neither of which has happened lately due to mixed economic indicators. This led VIX to plunge to its lowest level in more than 12 years in May. This either reflects no upcoming fears or a greater level of complacency in the stock market.

The Citi Volatility Index ETN (CVOL) turned out to be the major loser of the month, shedding a whopping 19%. Apart from this other volatility products such as iPath S&P 500 VIX Short-Term Futures ETN (VXX), ProShares VIX Short-Term Futures ETF (VIXY) and VelocityShares Daily Long VIX Short-Term ETN (VIIX) also lost more than 16% in May.

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