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Top ETF Stories of First Quarter 2016

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The start to the first quarter of 2016 was a nightmare, given the twin attacks from oil price slide and China turmoil that intensified fears of a global slowdown. However, these concerns started to fade in the back half of the quarter on continued signs of improvement in the domestic and international markets, pushing global stocks higher.

Given this, several events have impacted the ETF world in either a positive or a negative way. Below, we have discussed some of them that dominated headlines and are worth watching in the next quarter:

Fed Turned Dovish Again

After pulling the trigger for the first rate hike in almost a decade in mid-December, the Fed turned dovish again this year. The cautious approach came on the heels of increased market volatility, global growth concerns, and softness in exports and business investments. In the March meeting, the Fed kept the short-term interest rates steady in the 0.25–0.50% band and dialed back its projection for this year’s hikes. The central bank now expects the federal funds rate to rise to 0.875% by the end of the year, implying two lift-offs, compared with 1.375% that signaled four rate hikes.

Expectations of longer-than-expected lower rates have given a boost to the rate-sensitive sectors such as utilities and real estate and high-yield securities. In fact, many of the utility and dividend ETFs like Vanguard Utilities ETF (VPU - Free Report) , Utilities Select Sector SPDR (XLU), iShares U.S. Utilities ETF (IDU), PowerShares S&P 500 High Dividend Portfolio (SPHD - Free Report) , First Trust Morningstar Dividend Leaders Index Fund (FDL) and ProShares S&P 500 Aristocrats ETF (NOBL - Free Report) have been hitting regular 52-week highs and are expected to move higher in the coming weeks (read: Dividend ETFs Hitting All-Time Highs Ahead of Fed Meet).
Though real estate ETFs have not made new highs, they are outperforming the broad market from a year-to-date look. Some of the top ranked funds are Vanguard REIT Index ETF (VNQ - Free Report) , iShares U.S. Real Estate ETF (IYR) and SPDR Dow Jones REIT ETF (RWR) that are expected to continue their outperformance.

Crazy Run of ‘The Oil’

Oil price has been seesawing between losses and gains touching 12-year lows in mid February and then spiraling back to the $40-per-barrel mark in mid March. This spectacular performance led to smooth trading in the overall energy space. In particular, stock-based energy ETFs like PowerShares S&P SmallCap Energy Fund (PSCE - Free Report) , SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and First Trust ISE-Revere Natural Gas Index Fund (FCG - Free Report) surged at least 19% over the past one month. Futures-based energy ETFs like United States Oil Fund (USO - Free Report) and United States Brent Oil Fund (BNO - Free Report) gained 7% each (read: Crude Back to $40: Can Energy ETFs Sustain Their Rally?).

However, this impressive rally is too good to last as demand will not be enough to reduce the global supply glut. While U.S. producers have started to reduce output and OPEC is looking to freeze production at January levels, increased production from Kuwait, Saudi Arabia and Iran will continue to weigh on the price, thereby failing to rebalance the oil market at least in the short term. Further, PSCE and XOP have an unfavorable Zacks ETF Rank of 5 or ‘Strong Sell’ rating and 4 or ‘Sell’ rating, respectively, while FCG has a Zacks ETF Rank of 3.

Japan Moves to Negative Rates

In late January, Bank of Japan (BoJ) adopted measures similar to the European Central Bank (ECB) by pushing interest rates to the negative territory, minus 0.1%, for the first time. The aim is to revive growth in the world's third-largest economy. The move sparked a rally in the Japanese ETFs while weakened the yen against the greenback. Some of the top ranked ETFs in this space are WisdomTree Japan Hedged Equity Fund (DXJ - Free Report) , Deutsche X-trackers MSCI Japan Hedged Equity ((DBJP - Free Report) , WisdomTree Japan Hedged SmallCap Equity Fund (DXJS) and iShares Currency Hedged MSCI Japan ETF (HEWJ) (read: Japan ETFs to Buy on Negative Interest Rates).

Negative interest rates in Japan had also accelerated the selling wave in the global banking sector in early February, which was already bearing the brunt of the tumultuous ride in the market. Nevertheless, the banking sector has been emerging from the crisis in recent weeks on a rebound in oil prices and improving global sentiments.

Gold and Gold Miners Rocking

After posting the third annual loss in 2015, gold has been on a tear this year as increased market volatility has perked up demand for the yellow metal as a store of value and a hedge against market turmoil. Additionally, the expectation for longer-than-expected low rates will continue to raise the appeal for the gold bullion. Notably, SPDR Gold Trust ETF (GLD - Free Report) , iShares Gold Trust (IAU), ETFS Physical Swiss Gold Shares (SGOL) and Van Eck Merk Gold Trust (OUNZ) are up about 17% each, from a year-to-date look. These funds have a Zacks ETF Rank of 3 (read: Ride on Gold Rally with Best ETFs and Stocks of 2016).
Acting as a leveraged play on underlying metal prices, metal miners tend to experience more gains than their bullion cousins in a rising metal market. In particular, iShares MSCI Global Gold Miners ETF (RING - Free Report) stole the show in terms of performance, surging 59.3%. This was followed by gains of 52.8% for ALPS Sprott Junior Gold Miners ETF (SGDJ), 50.5% for PowerShares Global Gold and Precious Metals Portfolio (PSAU) and 50.3% for Sprott Gold Miners ETF (SGDM).

Bottom Line

Investors should closely watch the developments in these spaces as we head into the next quarter and should tap opportunities as and when they come.

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