Domestic stocks impressed in the third quarter with the S&P 500 finishing the July through September period with a gain of 7.4%. Even with that, the number of exchange-traded funds (ETFs) posting third-quarter gains of 10% or more is not particularly gaudy.
Just over 120 U.S.-listed ETFs notched double-digit, third-quarter gains. Strip out leveraged ETFs and that number declines in significant fashion. Still, there were some impressive ETF performers during the third quarter, some well-known, others obscure.
While the number of funds that can be considered the best ETFs of the third quarter is not necessarily large, the best ETFs of the past three months do span a wide array of asset classes and investment opportunities. Some of the best ETFs from the third quarter include commodities funds and funds from the downtrodden emerging markets complex.
Here are some of the third-quarter’s best ETFs, some of which have the potential to extend their gains through the end of this year.
Invesco DB Oil Fund (DBO)
Expense Ratio: 0.78%, or $78 annually per $10,000 invested
Oil is one of this year’s best-performing commodities, a theme that continued in the third quarter. The Invesco DB Oil Fund (NYSEARCA:DBO) was one of the prior quarter’s best-performing commodities ETFs, notching a gain of 10.7%.
DBO “is designed for investors who want a cost-effective and convenient way to invest in commodity futures. The Index is a rules-based index composed of futures contracts on light sweet crude oil (WTI),” according to Invesco.
DBO is looking to keep its best ETFs status running in the fourth quarter and got off to a good start, posting a gain of 3.12% on Monday as oil prices jumped to multi-year highs. Still, some analysts believe oil prices are bound to retreat.
“Eventually, we expect pain for oil prices as growing U.S. production serves as the primary weight to tip oil markets back into oversupply,” said Morningstar.
Change Finance U.S. Large Cap Fossil Free ETF (CHGX)
Expense Ratio: 0.49%
Yes, oil is surging and the energy sector is rebounding from its 2017 doldrums, but those scenarios are not hindering ETFs that lack exposure to traditional energy stocks. The Change Finance U.S. Large Cap Fossil Free ETF (NYSEARCA:CHGX) gained more than 10% in the third quarter.
One of the best ETFs in the third quarter, CHGX does much more than exclude companies engaged in the production of fossil fuels. Companies producing nuclear power, GMOs, military weapons or pesticides are also excluded from the CHGX portfolio.
Also excluded are “companies with a history of controversial business practice relating to human rights, labor rights (including, but not limited to, forced labor, child labor, and discrimination), environment, or business malpractice (including, but not limited to, corruption and taxes),” according to the issuer.
CHGX, which is nearly a year old, currently holds approximately 100 stocks.
iShares MSCI Poland ETF (EPOL)
Expense Ratio: 0.63%
By the standard set earlier this year, the MSCI Emerging Markets Index finishing flat in the third quarter is a positive accomplishment. Similar words can be used with the iShares MSCI Poland ETF (NYSEARCA:EPOL). EPOL was one of the third-quarter’s best ETFs, gaining 11%, but the Poland fund is still down nearly 12% year-to-date.
It has gone somewhat overlooked, but index provider FTSE Russell now classifies Poland as a developed market, so investors in the Vanguard FTSE Emerging Markets ETF (NYSEARCA:VWO) will not see Polish stocks in that fund any longer. There are some favorable traits that could help EPOL retain its status among the best ETFs.
“Ratings agency Moody’s last month revised upward its forecast for Polish GDP growth this year to 5 percent, and it also raised its projection for Poland’s economic growth next year to 4.2 percent,” reports Radio Poland. “The Polish economy grew 5.1 percent in the second quarter of this year, the country’s Central Statistical Office (GUS) said in late August.”
WisdomTree Japan Hedged Equity Fund (DXJ)
Expense Ratio: 0.48%
The dollar is strong and many ex-U.S. markets, developed and emerging, are languishing this year. Japan has not been immune to the developed markets struggle, but that scenario is reversing for the better. The WisdomTree Japan Hedged Equity Fund (NYSEARCA:DXJ) was one of the best ETFs tracking a developed market in the third quarter, posting a gain of 8.8%.
DXJ’s best ETF status appears to be accelerating as the fund is up 7% over the past month and recently surged back above its 200-day moving average. These days, a familiar refrain is that markets outside the U.S. are inexpensive relative to the S&P 500 and other major domestic equity benchmarks, but there is value and there are value traps. Japan is more the former than the latter.
“Against a backdrop of very attractive equity valuations — at 13.7x, the TOPIX price-to-earnings (P/E) multiple has dropped back to the lowest 5% level reported over the past decade — the trigger for upside performance must come from positive earnings surprises,” according to WisdomTree. “Our analysis suggests the probability of a sharp positive inflection in earnings visibility is about to be delivered in Japan, possibly as early as the upcoming fiscal half-year results season, which is about to get going by the end of October.”
Fidelity MSCI Health Care Index ETF (FHLC)
Expense Ratio: 0.084%
To access some of the best ETFs in the prior quarter, investors did not need to bite off significant risk. The Fidelity MSCI Health Care Index ETF (NYSEARCA:FHLC) proved as much. This Fidelity fund is a plain vanilla play on the healthcare sector, focusing heavily on large-cap, blue-chip pharmaceuticals and biotechnology stocks.
FHLC also proves that some of the best ETFs can also be cheap. Fidelity offers the cheapest lineup of sector ETFs on the market and that includes FHLC. With a third-quarter gain of 13.2%, FHLC was one of several healthcare ETFs ranking among the best ETFs overall during the July through September time frame.
FHLC has seen year-to-date inflows of $341.44 billion, or more than 20% of its $1.50 billion in assets under management.
iShares U.S. Aerospace & Defense ETF (ITA)
Expense Ratio: 0.43%
Aerospace and defense funds are among the best ETFs tracking industrial stocks this year. In fact, funds such as the iShares U.S. Aerospace & Defense ETF (BATS:ITA) are easily topping traditional, diversified industrial ETFs. ITA was one of the best ETFs in the third quarter, posting a gain of 12.60%, which elevated its year-to-date showing to just over 16%.
The $6.11 billion ITA targets the Dow Jones U.S. Select Aerospace & Defense Index and holds nearly 40 stocks. Nearly 20% of the fund’s weight is concentrated in two members of the Dow Jones Industrial Average: Boeing (NYSE:BA) and United Technologies (NYSE:UTX).
Last year, aerospace and defense earnings growth topped that of the S&P 500, a trend that is expected to repeat this year. Bolstering the case for ITA as one of the best ETFs for the long-term is that aerospace earnings growth is expected to top the broader markets for several more years.
ETFMG Alternative Harvest ETF (MJ)
Expense Ratio: 0.75%
Last, but certainly not least is the ETFMG Alternative Harvest ETF (NYSEARCA:MJ). The only U.S.-listed marijuana ETF was easily one of the best ETFs of the third-quarter, surging a stunning 36.40%. Much of MJ’s recent ebullience can be tied to the anticipation of Canada officially legalizing recreational marijuana later this month.
The notorious, volatile Tilray (NASDAQ:TLRY) is MJ’s largest holding at 9.66% of the fund’s weight. Three other holdings also garner weights in excess of 9%. Canada-based Tilray went public in the third quarter, undoubtedly fueling MJ’s ascent over the past several months, but Tilray has its doubters. With little revenue and a market value of $22 billion, those doubters could be proven correct.
Overall, MJ holds roughly 40 stocks. Whether it is a good sign or a warning sign, MJ saw third-quarter inflows of $151.60 million, which is a significant chunk of this best ETF’s $678.88 million in assets under management.
Todd Shriber owns shares of VWO.