Finding the best ETFs for 2020 has been particularly difficult after the coronavirus from China curve ball. My pick for the contest, the SPDR Innovative Technology Fund (NYSEARCA:XITK), was off to a strong start, rallying more than 13% in the first six weeks of the year. However, like many names, XITK has been crushed.
The exchange-traded fund fell 36% from peak to trough and is currently down about 13.4% year to date. However, amid those depressing losses sits a couple pieces of good news.
While the peak-to-trough decline in the ETF is ugly, it wasn’t out of line with the S&P 500. In fact, it was roughly in-line with the 35.6% high-to-low drawdown we saw in the SPDR S&P 500 ETF (NYSEARCA:SPY).
Second, the SPY rallied just 5.6% to its 2020 high, before being smashed as volatility rose. In other words, it rose half the amount that the XITK ETF did before suffering a similar decline. Lastly, with the XITK down a lackluster 13.4% year to date, the SPY still lags that performance by 1,000 basis points, currently down 23.4%.
So, it’s not all bad news.
A Closer Look at XITK
One reason this ETF is holding up so well? Zoom Video (NASDAQ:ZM).
ZM stock has exploded higher, rallying more than 100% so far in 2020. That’s the No. 1 holding in the XITK ETF at the moment, although it only has a weighting of 2.4%.
Some of these stocks are benefiting from the coronavirus outbreak. Those under stay-at-home and quarantine orders have little to do but stream video (like Netflix). Meanwhile, Slack continues to see users flock to its platform as teams work remotely. But not all of the ETF’s holdings have managed to avoid pain.
Still, five of the top ten holds in the XITK are positive over the last three months. Only one — Amazon (NASDAQ:AMZN) — can make a similar claim in the SPY.
But here’s the most encouraging observation to me: This growth-stock ETF should be badly lagging the S&P 500. It shouldn’t be in-line with it and it certainly shouldn’t be outperforming it right now. I don’t want to get too optimistic here, but so far, we are only suffering SPY-equivalent losses on the downside, while reaping more upside when stocks are rallying.
I’m not sure when or where the stock market will ultimately bottom. For all we know, maybe it already did. In any event, to see such solid performance out of XITK gives me confidence that when COVID-19 blows over and the market gets back into “rally mode,” this ETF is going to fly higher.
Is It Still One of the Best ETFs for 2020?
After peeling back some of the layers on this ETF, we’ve found some more interesting data points. For instance, over the past year, the ETF is down less than 5%. That compares to a near-12% decline in the SPY during the same timeframe.
Despite its rapid fall from the highs, XITK has dominated the SPY on multiple fronts. The most glaring is the 56.1% return over the last three years vs. a return of just 5.3% for the SPY ETF. Further, the XITK has superior returns over the last one month, three months, six months and since its inception in January 2016.
The XITK ETF is now a four-star rated ETF by MorningStar, while commanding a risk-rating of just “moderate.” Admittedly, it has “above-average” risk, but it also has “high” returns. That’s clear from some of the data points above.
The most recent ETF report writes, “although this fund employed greater risk during the last 3 years than other funds in its category, it has been compensated for that risk with a positive Alpha [outperforming its benchmark] and Sharpe Ratio of 1.11.”
At the end of the day, it’s my observation that the XITK has led to outsized returns while maintaining reasonable drawdowns compared to the S&P 500. As a result, I am looking for an eventual rebound in the fund. If we can get a sharp economic rebound in the third and fourth quarter, the ETF could certainly be one of the best performing ETFs of 2020.