By Christopher Gannatti
As of June 30, 2014, WisdomTree had 49 equity exchange-traded funds (ETFs), and 42 of those were incepted prior to December 31, 2013. We thought it worthwhile to showcase, out of these 42 equity ETFs, the top five and bottom five performers of 2014, measured through June 30, 2014, to see what distinct themes about global equity performance would emerge.
Average Annual Performance
Top 5 & Bottom 5 of 2014: Equity ETFs
Top 5 Performers
India as the Top Performer: WisdomTree's India Earnings Fund (NYSEARCA:EPI) was far and away the top performer of the group. Initially, this was due to excitement over the prospects for a change in government leadership, leading up to the announcement on May 16, 2014, of the Bharatiya Janata Party (BJP)1 and Prime Minister Modi's electoral victory. Performance has been positive since then as it is perceived that India's very necessary reform effort is moving in a positive direction.
Utilities for Yield-Hungry Investors: Interest rates in developed markets have been trending downward2, but investors have been hungry for income-producing options. Utilities are one such place they have looked. The WisdomTree Global ex-U.S. Utilities Fund (NYSEARCA:DBU) tracks, after costs, fees and expenses, the performance of an Index3 that focuses on the Utilities sector outside of the U.S. Performance of greater than 20% over the period was seen in such markets as Poland, Portugal, Spain, Finland and Indonesia.4 It's important to note that the S&P 500 Utilities Index was up 18.7% for the period5, so the "ex-US" missed a very strong U.S. Utilities market over the period.
The Middle East Upgrades: In June 2014 MSCI officially upgraded the United Arab Emirates and Qatar to emerging market status.6 Since then, however, the situation in the Middle East region has become volatile, so much of the positive performance from the WisdomTree Middle East Dividend Fund (NASDAQ:GULF) occurred closer to the beginning of 2014 than to the midpoint.
Real Estate: While the WisdomTree Global ex-U.S. Real Estate Fund (NYSEARCA:DRW) has broken into double digits with its performance, it's important to note that U.S. real estate Indexes have outperformed it over this period7. It is another sector that, like Utilities, has the potential for helping to solve a need for income. The ultralow interest rates around the world and further support from the European and Japanese central banks are supporting real estate and income investment strategies around the world.
U.S. Mid-Caps: The WisdomTree MidCap Dividend Fund (NYSEARCA:DON) rounds out the top five performing ETFs over this period.
Valuation Concerns in U.S. Small Caps: Both the WisdomTree SmallCap Earnings ETF (EES) and WisdomTree U.S. SmallCap Dividend Growth ETF (DGRS) represent U.S. small-cap options, and this market was very strong in 2013. Both of these funds track the performance of Indexes8 that are exposed to less-speculative and less-leveraged parts of the U.S. small-cap market, making them particularly suited for a potential rising-rate environment.
Japan Has Been Volatile: After the breakout performance year of 2013, equities within Japan have been challenged. Abenomics is now less about making big announcements and more about following through on the proposed incremental reforms. The road to success will not be traveled in the short term, but it's worth noting that since May 21 the WisdomTree Japan Hedged Equity ETF (DXJ) is up more than 8.5%.9
WisdomTree's Worst-Performing Equity Fund Thus Far in 2014: At times, investment strategies are created to focus on the worst performers of a particular period, and for those searching for that option at WisdomTree, the answer is the WisdomTree Korea Hedged Equity ETF (NASDAQ:DXKW). Korean firms have been hit hard by the depreciating yen, in that many Korean firms produce products that are very similar to their Japanese counterparts, and the Japanese products have become less expensive within their export markets. With the possibility of intervention by the Bank of Korea to try to weaken the won, Korea's currency, we wrote about the potential opportunity that we see in this market in a prior blog post.
Looking Forward to the Second Half
As we write this piece on July 18, 2014, we've already seen transpiring major geopolitical events that will have the potential to impact equity markets around the globe in the second half of 2014. For momentum-oriented investors who look to continue to ride the performance wave, these five top-performing funds are worth watching, while the contrarian and value-seeking investors should find value in these bottom-performing segments.
- Bharatiya Janata Party (BJP): A political party in India.
- Source: Bloomberg. 10-year government bond interest rates in the United States, Japan, the United Kingdom, Germany, Spain and Australia were all lower on 7/15/14 than on 12/31/13.
- Refers to the WisdomTree Global ex- U.S. Utilities Index.
- Source: Bloomberg, with performance measured for constituents of the WisdomTree Global ex-US Utilities Index within these markets for the period 12/31/13 to 6/30/14.
- Source: Bloomberg, with performance measured from 12/31/13 to 6/30/14.
- Source: "MSCI Market Classification & Implementation Q&A," MSCI, December 2013.
- Source: Bloomberg. MSCI US REIT Index & Dow Jones U.S. Real Estate Index performed 17.7% and 16.4%, respectively, for the 12/31/13 to 6/30/14 period.
- EES tracks the WisdomTree SmallCap Earnings Index, and DGRS tracks the WisdomTree U.S. SmallCap Dividend Growth Index.
- Refers to performance of DXJ at NAV from 5/21/14 to 6/30/14.
Important Risks Related to this Article
High double-digit returns are highly unusual and cannot be sustained. Investors should also be aware that these returns were achieved primarily during favorable market conditions. A Fund's performance, especially for very short periods, should not be the sole factor in making an investment decision.
There are risks associated with investing, including possible loss of principal. Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. Funds focusing their investments in certain countries or regions, such as India, China, the Middle East, Japan and Korea, may be impacted by events and developments associated with the country or region, which can adversely affect performance. Investments in emerging, offshore or frontier markets are generally less liquid and less efficient than investments in developed markets and are subject to additional risks, such as risks of adverse governmental regulation and intervention or political developments. Funds focusing their investments on certain sectors and/or smaller companies increase their vulnerability to any single economic or regulatory development. This may result in greater share price volatility.
Investments in currency involve additional special risks, such as credit risk and interest rate fluctuations. In addition, when interest rates fall, income may decline.
As these Funds have a high concentration in some sectors, the Funds can be adversely affected by changes in those sectors. Due to the investment strategy of these Funds, they may make higher capital gain distributions than other ETFs. Please read each Fund's prospectus for specific details regarding each Fund's risk profile.
Christopher Gannatti, Associate Director of Research
Christopher Gannatti began at WisdomTree as a Research Analyst in December 2010, working directly with Jeremy Schwartz, CFA®, Director of Research. He is involved in creating and communicating WisdomTree's thoughts on the markets, as well as analyzing existing strategies and developing new approaches. Christopher came to WisdomTree from Lord Abbett, where he worked for four and a half years as a Regional Consultant.