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Top and Flop ETFs at Half-Way Q2

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At the midway through the second quarter, stocks across the globe are stuck in a nasty web of woes including a strong dollar, U.S.-China trade war fears and geopolitical tension. In particular, with threats of sanctions doing rounds between the two largest economies, investors all over the world were compelled to take flight to safety at the start of the quarter. As such, U.S. stocks had a worst start to the second quarter since the Great Depression, with the contagion spreading to international markets as well.

Now, the United States and China have put their trade war on hold, dropping tariff threats and setting up a framework to address potential trade imbalances in the future. However, the talks are in the initial stage and any negative development could roil the markets in the coming months.

Additionally, growing inflationary pressures have resulted in an increase in yields thereby raising expectations of further interest rate hikes from the Federal Reserve. The U.S. dollar also resumed its strength spurred by a rise in bond yields. This has raised worries over emerging markets, which were the worst hit by the taper tantrum of 2013 that resulted in a huge capital flight (read: Are Good Times Over for Emerging Market ETFs?).

The acceleration in the greenback has been hurting emerging market currencies and the economies, with Argentina and Turkey being the worst hit. This is because the slump in currencies has been pushing inflation higher and forcing their central banks to raise interest rates, thus ending the emerging markets’ three-year long interest rate cut cycle.

Additionally, the ongoing political chaos in Italy has been weighing heavily on the European markets while Japan failed to sustain its longest stretch of economic expansion since the 1980s. After two years of strong growth, the world's third-largest economy contracted 0.6% in the first quarter of 2018, more than the expected 0.2% decline. However, solid corporate earnings worldwide have raised investors’ sentiment to some extent (read: Focus on Small Cap ETFs for Japan Exposure).

Globally, oil prices have jumped to $80 per barrel on tightening supply conditions brought in by OEPC output cuts, looming Iran sanctions and the new Venezuela sanctions imposed by Trump.

Given this, we have highlighted both the best and worst performing ETFs at halfway Q2:

Best ETFs

PowerShares S&P SmallCap Energy Fund (PSCE - Free Report) – Up 34%

Oil price rally has brought back the allure for the energy ETFs. As such, PSCE, which provides exposure to the U.S. small-cap segment of the energy sector by tracking the S&P Small Cap 600 Capped Energy Index, has gained the most so far in the second quarter. Holding 31 securities in its basket, it is highly concentrated on the top firm with double-digit exposure while other firms hold less than 8.7% of total assets. The fund is less popular with AUM of $78.7 million and average daily volume of 59,000 shares. It charges 29 bps in fees per year and has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: Tap Oil with Best Energy ETFs & Stocks YTD).

Barclays Inverse US Treasury Composite ETN TAPR - Up 17.3%

This note is the star performer in the bond space providing investors a unique strategy to hedge against or benefit from rising U.S. interest rates by tracking the Barclays Inverse US Treasury Futures Composite Index. This benchmark employs a strategy, which follows the sum of the returns of the periodically rebalanced short positions in equal face values of each of the 2-year, 5-year, 10-year, long-bond and ultra-long U.S. Treasury futures contracts. The ETN has accumulated $19.6 million in AUM and trades in light volume of about 2,000 shares per day on average. It charges 43 bps in annual fees (read: ETF Strategies to Play the 7-Year High Benchmark Yield).

iShares North American Natural Resources ETF IGE - Up 14.9%

This fund offers exposure to oil and gas, mining, and forestry companies by tracking the S&P North American Natural Resources Sector Index. It holds 133 stocks in its basket with none holding more than 7.4% of assets. The ETF has key holdings in oil & gas exploration & production, integrated oil & gas, oil & gas equipment & services, and oil & gas storage & transportation that accounts for double-digit exposure each. It has amassed $1.1 billion in AUM and trades in average daily volume of 91,000 shares. The fund charges 48 bps in annual fees.

Worst ETFs

ProShares VIX Short-Term Futures ETF VIXY – Down 27.8%

Volatility products have been the terrible performers so far this quarter. This product seeks to profit from increases in the expected volatility of the S&P 500, as measured by the prices of VIX futures contracts. It focuses on the S&P 500 VIX Short-Term Futures Index, which measures the returns of a portfolio of monthly VIX futures contracts with a weighted average of one month to expiration. The fund has amassed $102.5 million in AUM and charges 85 bps in fees per year. Volume is heavy exchanging about 2.2 million shares in hand on average.

iShares MSCI Turkey ETF TUR – Down 22.9%

The ETF follows the MSCI Turkey Investable Market Index and provides a pure play exposure to 68 Turkish stocks. It is highly concentrated on the top firms with each making up for less than 9% share. Financials dominates the fund’s returns accounting for about one-third of the portfolio while industrials, materials and consumer staples receive double-digit exposure each in the basket. The fund has been able to manage $240.7 million in its asset base and trades in solid volume of about 355,000 shares per day in average. The fund charges 62 bps in annual fees from investors and has a Zacks ETF Rank of 5 (Strong Sell) with a High risk outlook (read: Turkey's Economic Crisis & a Closer Look at its ETF).

VanEck Vectors Brazil Small-Cap ETF BRF – Down 15.5%

The fund follows the MVIS Brazil Small-Cap Index and targets the small cap segment of the Brazilian stock market. Holding 64 stocks in its basket, it is pretty well spread across components with none accounting for more than 5.8% of assets. Consumer discretionary and utilities take the top two spots in terms of sector at 27.4% and 24.2%, respectively. BRF has $88.5 million in AUM and trades in lower volume of 38,000 shares. It charges 60 bps in annual fees and has a Zacks ETF Rank #3 with a High risk outlook.

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