If you were looking for the best ETFs from the first quarter, you certainly shouldn’t be looking at the broader markets.
No, general U.S. equities had a relatively benign performance in Q1, led by a 0.88% gain in the SPDR S&P 500 ETF Trust (NYSEARCA:SPY).
That’s not exactly lighting the world on fire.
But there were pockets of strength. According to Global Macro Monitor, three sectors really lit it up in Q1: healthcare, consumer discretionary and telecom. Out of the nine sectors that make up the S&P 500, only these three managed to generate returns greater than 1% over the first three months of the year.
So, our look at the best ETFs of Q1 will focus on a fund from each of these sectors. Here’s what these ETFs did right.
The Best ETFs of Q1 2015: SPDR S&P Biotech (ETF) (XBI)
Q1 Performance: +21%
The healthcare sector delivered roughly 5% year-to-date performance, and as a result, a slew of funds could be considered among the quarter’s best ETFs.
The absolute top ETF was actually the ProShares Ultra Nasdaq Biotechnology ETF (NASDAQ:BIB), which surged 26% in 2015’s first quarter. However, because the BIB uses leverage, I’m excluding it from consideration.
Among pure equity funds in the healthcare space, it was the SPDR S&P Biotech ETF (XBI) that ranked among the quarter’s best ETFs.
What’s so good about XBI … besides the fact it delivered a quarterly return more than 700 basis points greater than the S&P 500’s return for all of 2014?
Well, XBI has several redeeming qualities:
- For starters, it has total net assets of $2.2 billion and daily volume of 1.5 million shares, meaning its big and it’s got liquidity should you need to get out of your position.
- Because it’s one of State Street Global Advisors’ SPDRs, its expense ratio is nice and low at 0.35% annually — pretty good for a specialty ETF.
- Probably the most under appreciated aspect of XBI is its focus on smaller companies. Sure, biotechnology leans that way because many of the companies held aren’t making money, but it does provide nice non-correlation (74% in micro- or small-caps) to large-cap stocks.
If you’re wondering how much of a position XBI should take up in your portfolio, I look at it this way: Healthcare stocks make up 14.6% of the S&P Total Stock Market Index, so at best I would limit it to 15% of your portfolio. Even then, biotech stocks could be ready for some poor performance after outdoing the S&P 500 in eight of the last nine years.
Regression to the mean is bound to take hold at some point.
The Best ETFs of Q1 2015: iShares Global Consumer Discretionary ETF (RXI)
Q1 Performance: +6.3%
This sector is the one I’m most comfortable with, it’s the one I’m most familiar with, and it’s the one I find most interesting … which means it’s also the toughest to make a decision about when it comes to the best ETFs.
According to ETF Database, the top 2 consumer discretionary ETF performers were in India and China in Q1, and while it’s tempting to recommend one of these, I think it makes more sense to go with a broader selection that’s seen good performance in 2015 but also is more geographically diverse.
For this reason, my second choice for best ETF is the iShares Global Consumer Discretionary ETF (NYSEARCA:RXI), which invests in many different developed countries including the U.S., its top weighting at 58% of its $378 million in total net assets.
The top five stocks in RXI by weighting are Toyota Motor Corp (ADR) (NYSE:TM), Walt Disney Co (NYSE:DIS), Home Depot Inc (NYSE:HD), Comcast Corporation (NASDAQ:CMCSA) and Amazon.com, Inc. (NASDAQ:AMZN), which together represent 20% of the 174-stock portfolio. It’s got some concentration while not overdoing it.
A $10,000 investment in September 2006 is worth $20,400 today. Over the last five years, the RXI has outperformed the S&P 500 by 134 basis points on an annualized basis.
As the world economy goes, so goes the RXI.
The Best ETFs of Q1 2015: Vanguard Telecommunication Services ETF (VOX)
Q1 Performance: +2%
Telecom is the least interesting of the three sectors, and also the least explosive — the broader sector’s 1.7% gains in Q1 are modest, but again, they did mean the S&P 500.
With not much difference in terms of performance between most of the telecom ETFs in Q1, it makes sense (at least to me) to look at the fund with the lowest expense ratio, as the returns of many of the obvious choices have been hit-or-miss during the six-year bull market.
So, the easy choice for me is the Vanguard Telecom ETF (VOX), which charges just 0.12% annually and delivered 2.04% in the first three months of the year. Vanguard ETFs are notoriously inexpensive, and VOX is no different.
With its top 10 holdings a who’s who of U.S. telecommunications’ companies, representing 71% of the nearly $1 billion in net total assets, a bet on VOX is a bet on big telecom. The SPY can give you some of these companies, but not nearly with the same focused weightings.
And over the past 10 years, a $10,000 investment in VOX has done marginally better than the S&P 500 — all told, the total return on VOX is 121% vs. 114% for the SPY.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.