Though the stock market has made an impressive comeback from the worst nightmare it saw at the start of the year, bouts of volatility and uncertainty persist. Investors should not be fooled by the false spike or fall in stock prices. This is especially true, as many ETFs that have been performing well over the past month or a year-to-date look may not continue their trend in the coming months and vice versa (read: Top ETF Stories of First Quarter 2016).
Let's find out some of the hidden gems in the ETF world and see whether they are bluffing investors or not.
Oil price has seen wild swings so far this year crashing to a 12-year low of $26.21 per barrel on February 11 and then spiraling back to $40 per barrel mark recently. With this, oil climbed nearly 14% in March, which turned out to be the best month in almost a year. As a result, the ultra-popular United States Oil Fund (NYSEARCA:USO), which tracks the price of U.S. light crude, rose 10.5% in March while the PowerShares S&P SmallCap Energy Portfolio ETF (NASDAQ:PSCE) topped the list of the best performing energy ETFs in March, surging nearly 25%.
This rally might fade soon given that the oil market is still oversupplied. While the U.S. producers have started to reduce output and OPEC is looking to freeze production, Iran is ramping up its production after the international sanctions on it were lifted in January. And even if the deal to freeze oil output is reached this month, the world will still have about 300 million excess barrels per year than needed. This is because the major countries produced oil at their record levels in January. Thus, it would be difficult to rebalance the oil market at least in the short term (read: Crude Back to $40: Can Energy ETFs Sustain Their Rally?).
As a result, the recent run-up in oil and energy ETFs might fool investors' going forward and a cautious approach should be taken while trading in this space. Notably, both USO and PSCE are down 12% and 2.5%, respectively, in the year-to-date timeframe.
Growth ETFs lagged the broad market in the first quarter due to endless worries stemming from the China turmoil and an oil price collapse. As such, the most popular PowerShares QQQ Trust ETF (NASDAQ:QQQ) shed 2.1% in the same period compared with gains of 1% for the iShares Russell 1000 Value ETF (NYSEARCA:IWD) and 1.6% for the SPDR S&P 500 Trust ETF (NYSEARCA:SPY). Given the performance, investors should not think that growth ETFs will underperform in the coming months too. This is because the positive momentum has been building up in the growth space on a spate of upbeat economic data, an impressive rebound in oil prices, some positive developments in international markets and of course, the spring fervor.
Small Cap ETFs
After lagging in the early weeks of 2016, small caps also regained investors' love last month with the iShares Russell 2000 ETF (NYSEARCA:IWM) crushing SPY by wide margins. The outperformance might continue in the months ahead given increased confidence in the economy as these stocks generally outperform when the American economy is leading the way. But if volatility flares up, small caps could be the terrible performers as huge gains and losses can occur in a very short period of time.
Gold logged in the best quarterly gains in three decades climbing 16% on the back of the reduced expectations for rate hike, global growth worries, and geopolitical tensions. Most of the gains came in the first six weeks of the year and thereafter the momentum of increase slowed down. However, the recent dovish comments from the Fed again raised hopes for the yellow metal but this might not last too long.
Though the Fed signaled that interest rates in U.S. would stay low for some time and dialed back its projection from four lift-offs to two hikes in recent meeting, the stability in the financial market and an improving U.S. economy could bolster the case for rate hike again, thereby dulling the appeal for this safe haven asset. The ultra-popular gold ETFs - the SPDR Gold Trust ETF (NYSEARCA:GLD) and the iShares Gold Trust (NYSEARCA:IAU) - are up nearly 16% each from a year-to-date look.
Thanks to heightened volatility in the stock markets, leveraged or inverse ETFs have been gaining immense popularity as investors are making a dash for big gains on quick market turns. This is especially true as the stocks saw one of their best months since October, after seeing the worst-ever start to a year.
In this regard, leveraged gold miner ETFs such as the Daily Gold Miners Bull 3x Shares ETF (NYSEARCA:NUGT) and the Direxion Daily Junior Gold Miners Bull 3x Shares ETF (NYSEARCA:JNUG) and inverse leveraged biotechnology ETFs such as the ProShares UltraProShort Nasdaq Biotechnology ETF (NASDAQ:ZBIO) and the Direxion Daily S&P Biotech Bear 3x Shares ETF (NYSEARCA:LABD) were the top performing ETFs in the first quarter of 2016.
However, their continued outperformance cannot be guaranteed as these products are extremely volatile and the daily rebalancing - when combined with leverage - may make them deviate significantly from the expected long-term performance figures.
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