While 2014 was a turbulent year, one area of the market continued to strut its stuff was exchange-traded funds. The intraday tradable baskets of stocks, bonds and other assets remain a hugely popular choice for both retail and institutional investors alike, and climbed to just under $2 trillion assets among more than 1,500 ETFs.
Given that breadth of choice, sure, not every ETF soared, but a large number of funds were able to produce lofty gains for their investors.
And while there’s no guarantee that the best performers from 2014 will repeat their performance in the new year, many of the trends that propelled the best ETFs of 2014 higher should continue in 2015.
So, here’s our look at four of the best ETFs of 2014, as well as our thoughts on whether they can keep up the pace in the new year.
2014’s Best ETFs: First Trust NYSE Arca Biotechnology Index Fund (FBT)
YTD Performance: 49%
Expenses: 0.6% (or $60 for every $10,000 invested annually)
Despite plenty of volatility, biotech remained one of the best sectors of the stock market. Driven by new drug launches and a hefty dose of mergers and acquisitions, the First Trust NYSE Arca Biotechnology Index Fund (FBT) managed to gain nearly 50% through the last couple of days of 2014.
The key to FBT’s performance is its small size and equal-weight methodology. That construction means smaller biotech firms — which theoretically should be the fastest growers in the space — have just as much of an effect on the fund as larger, slower-growth companies. Holding a concentrated portfolio of just 30 names also helps.
All told, a combination of favorable tailwinds and smart fund construction have helped push FBT into the ranks of the best ETFs, with more than 265% returns over the past five years. And considering that healthcare spending and aging boomers will continue to be at the forefront in 2015, FBT could keep delivering next year and beyond.
2014’s Best ETFs: PowerShares China A-Shares Portfolio (CHNA)
YTD Performance: 58%
Looking past its slowing economy and a potential hard-landing scenario, investing in China-focused ETFs remained robust — and the PowerShares China A-Share Portfolio (CHNA) really took off. CHNA managed to produce nearly 60% returns in 2014.
CHNA isn’t a normal Chinese ETF. The fund is one of only a few vehicles that allow regular retail investors the ability to invest in Chinese stocks listed as “A shares.” There’s a virtual alphabet soup of Chinese stocks based on where and in what currency they are traded in. A shares represent the largest pool of stocks in China — vastly out numbering all the other share varieties — but have been restricted from foreign ownership.
That is, until this past November, when the Chinese government made it easier for non-Chinese citizens to own them.
What followed was a flurry of buying, and CHNA was the primary beneficiary. Still, further gains could be ahead as more pension funds and retail and institutional investors begin adding A shares to their holdings.
* Includes a fee waiver currently good through Aug. 31, 2015.
2014’s Best ETFs: iShares Cohen & Steers REIT ETF (ICF)
YTD Performance: 32%
The threat of rising interest rates was a common theme among high-yielding sectors and asset classes, as investors feared that the Fed’s impending cut would kill prices for these securities.
For real estate investment trusts, though, that simply hasn’t held true.
REITs enjoyed a boffo 2014, with the iShares Cohen & Steers REIT ETF (ICF) among the best ETFs in the industry, clocking 30%-plus returns with just a couple days to go in the year.
ICF’s underlying index focuses on the largest REITs, providing investors with access to quality firms that dominate their respective property markets. The ETF holds just 32 stocks, including top dogs like Simon Property Group Inc (SPG) and AvalonBay Communities Inc (AVB).
As we saw with the previously mentioned FBT, concentration can lead to bigger returns. ICF’s 32% gain managed to beat rival REIT ETFs by several percentage points.
All in all, as the market continues to rise, quality will remain the top draw for investors. As such, ICF should continue to see gains in the year ahead.
2014’s Best Performing ETFs #4: Pimco 25+ Year Zero Coupon U.S. Treasury Index ETF (ZROZ)
YTD Performance: 44%
As interest rates continue to sit at record lows, investors in long-dated bonds have made some serious bank. In fact, investors in the Pimco 25+ Year Zero Coupon U.S. Treasury Index ETF (ZROZ) — which tracks some of the longest-dated bonds — has managed to return a whopping 44% this year.
That’s right: A staid and boring bond fund is among one of the best ETFs on Wall Street this year.
ZROZ’s invests in zero-coupon bonds — bonds that pay no interest, but are sold at a discount to their par value. When the bond matures, investors get the par value — making their price very sensitive to interest rates as there’s no coupon to provide any cushion.
With low inflation — we still haven’t hit the Fed’s target of 2% — an increase an interest rates has seemed far off on the horizon, helping to drive ZROZ to new highs. And with several analysts projecting continued low inflation, ZROZ could continue to perform in 2015.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.