Exchange-traded funds allow investors to hone in on exactly where they want to invest, with everything from broad-based ETFs that cover the whole market to highly specialized ETFs that offer exposure to a particular industry. Over the course of 2015, several themes asserted themselves strongly, and their influence helped shape the list of top-performing ETFs. Let's take a look at three of these themes and the ETFs that benefited from them.
The plunge in energy prices
The biggest story in the investing world in 2015 was the drop in crude oil prices. Although that decline began in late 2014, it took time for the full impact of the drop to work its way through corporate earnings in the energy industry, and the extent of the downward move was much larger than most had anticipated. Although that was bad news for commodity investors, it was good news for the ETF shareholders who owned funds designed to rise as energy prices fell.
One tiny ETF doubled in price during the year, but among the more popularly traded ETFs, the ProShares UltraShort Bloomberg Crude Oil ETF (NYSEMKT:SCO) gained 78%, while the VelocityShares 3x Inverse Natural Gas ETN (NYSEMKT:DGAZ) climbed 74%. These leveraged ETFs are designed to track daily market moves rather than longer-term moves, but the nearly straight-downward movement in energy prices for much of the year made the inverse ETFs viable ways to profit from the decline.
Even as U.S. stock markets were largely unchanged for the year, some overseas stock markets gained a substantial amount of ground. In particular, the Japanese stock market benefited from a weaker yen and efforts to stimulate its economy, producing double-digit percentage gains for investors in index ETFs tracking the market.
Japan ETFs that focused on certain parts of the stock market did even better. The broad-based WisdomTree Japan Small-Cap Dividend ETF (NYSEMKT:DFJ) posted gains of 19%, while the WisdomTree Japan Hedged Health Care ETF climbed 37%. Given that Japan has even more extreme demographics than the U.S. in terms of its aging population, themes like healthcare should continue to work well for investors going forward.
Within the U.S. market, some ETFs concentrating on retail stocks did extremely well, but there was considerable dispersion across the retail ETF spectrum. In general, many traditional brick-and-mortar retailers had a tough time during 2015, but stocks that focused on e-commerce opportunities did well. As a result, the particular retail stocks held by an ETF played a key role in its returns.
For instance, the Market Vectors Retail ETF (NYSEMKT:RTH) had a particularly high concentration in online giant Amazon.com, which more than doubled during the year, and that helped give it a 12% return. The leveraged Direxion Daily Retail Bull 3x ETF (NYSEMKT:RETL) did even better, soaring 49% in 2015, as it benefited from video-streaming specialist Netflix, as well as Amazon and other strong performers. Yet several retail ETFs lost ground, largely as a result of owning too many companies with traditional mall-based business models that suffered during the year.
These three themes weren't the only ones that produced winning results for ETF investors in 2015, but they put the most ETFs at the top of the return list for the year. Because of the nearly unprecedented factors that led to some of these ETFs producing strong returns, investors shouldn't assume that these ETFs will give them a repeat performance in 2016.