When it comes to exchange-traded funds (ETFs), two things define success or failure: overall performance and assets gathered.
In 2013, the largest ETF by a country mile — SPDR S&P 500 ETF (SPY) — had a great year, gaining close to 30% as of Dec. 26. And it’s fair to say that S&P 500 ETFs were the year’s biggest success story.
But there were others, of course. That’s why, once again, we sorted through to find the best ETFs and worst ETFs the year had to offer.
In last year’s roundup of the best ETFs and worst ETFs, we excluded leverage, inverse and single-country funds from contention. This year, we allowed single-country funds into the fray because in several instances — good and bad — they’re worth mentioning.
But other than that our winners for the best ETFs and worst ETFs will be funds most regular investors should consider for their portfolios. Take a look:
Best ETFs – iShares Core S&P 500 (IVV)
According to industry research and consultancy firm ETFGI, iShares ETFs topped the list of best ETFs in terms of inflows, with a whopping $57.3 billion of inflows year-to-date through the end of November.
A key fund in its global market share dominance is the iShares Core S&P 500 ETF (IVV). IVV is the iShares version of an S&P 500 ETF, and it managed net inflows of $3 billion in November alone.
The big difference between IVV and the SPDR S&P 500 ETF (SPY) is that iShares reinvests dividends earned by the underlying stocks daily. SPY, as a unit investment trust, can only do so quarterly … creating a cash drag. In 2013 that cost SPY investors approximately 73 basis points performance and helped the IVV make the list of the year’s best ETFs.
Best ETFs – WisdomTree Japan Hedged Equity Fund (DXJ)
It shouldn’t be surprising that a strategy fund is next on our list of the best ETFs, because they are all the rage these days. According to BlackRock, strategy ETFs pulled in $61.3 billion in 2013 — a growth rate of 40% year-over-over. It seems investors want very specific funds in addition to their core holdings like the iShares Core S&P 500 ETF (IVV) in order to generate maximum results.
That’s why the WisdomTree Japan Hedged Equity Fund (DXJ) was one of the best ETFs of the year. WisdomTree had net inflows of $9.4 billion from just the DXJ in 2013. It’s a big reason why WisdomTree has the third highest rate of net inflows behind only Vanguard and iShares.
Although single-country funds involve additional risk because of the lack of diversification, the DXJ makes sense because it’s hedged. That removes the currency risk of the yen in relation to the U.S. dollar. Plus, Japan’s stocks have been down so long there’s probably more reversion to the mean that lies ahead for the DXJ. Don’t be surprised if this is one of the best ETFs next year as well.
Best ETFs – Vanguard Dividend Appreciation (VIG)
Another one of the best ETFs of 2013? A dividend ETF from good ol’ Vanguard. While the Vanguard Total Bond Market ETF (BND) was delivering negative returns in 2013, the Vanguard Dividend Appreciation (VIG) was busy putting its sister fund to shame. VIG has racked up 25% returns so far.
Of course, this fund wasn’t the only dividend ETF that had a nice year. Dividend funds as a whole took in a whopping $27.6 billion through the first 11 months of the year as investors abandoned fixed income investments and opted for the friendly confines of dividend stocks.
And while equities have been performing well the last couple of years, a dividend ETF is nice because it will still generate decent returns if or when stocks stop appreciating. That’s a valuable reassurance, and helped make VIG one of the best ETFs.
Honorable Mention for Best ETFs – iShares MSCI USA Quality Factor (QUAL)
Next up, we have the honorable mention for the best ETFs of the year … and it simply has to go to the iShares MSCI USA Quality Factor (QUAL). This iShares ETF was the sixth most successful launch in 2013, with QUAL managing to pull in $247 million since the middle of July.
QUAL tracks the MSCI USA Quality Index, which consists of high-quality growth stocks that possess high return on equity, stable year-over-year earnings growth and strong balance sheets. It has 124 holdings, tilted toward technology and consumer discretionary stocks.
Although this fund doesn’t have a full-year under its belt, it was one of the just 16 new ETFs to gather $100 million or more in assets and perform better than the SPDR S&P 500 ETF (SPY). That’s impressive considering 140 launched this year, suggests QUAL could be the next billion-dollar ETF and earns it a nod in this recap of the year’s best ETFs.
Worst ETFs – Market Vectors Gold Miners ETF (GDX)
The fact that a gold ETF was one of the worst this year should hardly be surprising. Gold simply hasn’t had a good year; just look at the SPDR Gold Shares (GLD). The GLD ETF is down almost 28% with only a few days of trading left in 2013.
Plus, the GLD ETF is probably a better investment than the Market Vectors Gold Miners ETF (GDX). The GDX ETF invests in 33 companies … primarily gold miners. These miners have fixed costs and when the price of gold drops, they’re in a heap of trouble unless they’ve managed to hedge against the inevitability. Most haven’t — yet. As a result, the GDX ETF is down 54% year-to-date.
Investing in gold might have some merit; investing in gold miners not so much.
Worst ETFs – Market Vectors India Small-Cap Index ETF (SCIF)
Before you jump to conclusions about two Market Vectors ETFs being a few of the year’s worst performers, it’s important to understand the Market Vectors India Small-Cap Index ETF (SCIF) is on the list.
Yes, bad performance definitely put SCIF here … but with most of the emerging markets doing poorly, there’s not much the fund could do to avoid its 35% drop.
Who knows, this emerging markets ETF could very well be one of the best ETFs in 2014. But still, the real problem for me is fees. The average investor shouldn’t be paying 0.91% annually for such a niche ETF when you can invest in something like the Vanguard FTSE Emerging Markets ETF (VWO) for 0.18% annually. Plus, the Vanguard emerging market ETF gives you plenty of India with more diversification and less volatility.
Worst ETFs – iShares MSCI Emerging Markets Materials ETF (EMMT)
The iShares MSCI Emerging Markets Materials ETF (EMMT) has also been far from one of the best ETFs this year. Taken directly from this iShares ETF fact sheet, the MSCI Emerging Markets Materials Index is a “free float-adjusted market capitalization weighted index designed to measure the combined equity market performance of the materials sector of emerging market countries.”
That exposure to metals and mining hasn’t been very good for EMMT, as investors in this fund have lost 22% this year. Meanwhile, investors who wanted emerging markets exposure but played it safe with the Vanguard FTSE Emerging Markets ETF (VWO) only lost 10% through the same period.
Once again, investors have taken a good idea — emerging markets — and ruined it by combining with a very cyclical sector. This isn’t a fund for amateurs.
Best ETFs and Worst ETFs – Takeaways
In last year’s wrap-up of the best ETFS, I said investors should “ride the momentum of financial services and home construction all the way through 2013 into 2014.” More specifically, I said the two best ETFs for those sectors were the iShares Dow Jones U.S. Financial Services Index Fund (IYG) and iShares Dow Jones U.S. Home Construction Index Fund (ITB).
They are up 41% and 12% respectively so far … so I was half right.
What are the best ETFs for 2014, then? Well, I think simplicity is the key. Don’t go making big bets on niche sectors, industries or countries. Instead, go for a few select core ETFs that spread the love around the world.
If I had to pick one bundle of stocks to top my personal list of the best ETFs, I would choose the Vanguard Total World Stock ETF (VT), which invests 48% of the fund’s $4.4 billion in net assets outside North America.
Here’s to 2014!
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.