After hitting record highs in the second quarter, stock and exchange traded funds experienced a steep correction in June, fueled by speculation that the Fed would begin tapering its quantitative easing program and a rising interest rate environment. Nevertheless, fears over an end to easy money abated somewhat and the markets recovered some lost ground in the last week of the month, and equities still maintained another positive quarter.
The Dow Jones Industrial Average gained 4.1% over the past three months. Meanwhile, the Nasdaq Composite increased 4.5% and the S&P 500 rose 3.8%.
Both the S&P 500 hit a historic high of 1,669 and the Dow also hit an all-time high of 15,409 in the month of May.
The top non-leveraged ETF in the second quarter include the Guggenheim Solar ETF (NSYEArca: TAN) up 47.4%, Market Vectors Solar Energy (NYSEArca: KWT) up 29.2% and First Trust NASDAQ Clean Edge Green Energy Index Fund (NasdaqGIDS: QCLN) up 27.5%.
Solar ETFs are generating high returns as the industry outshines expectations that a string of negative factors would weigh on solar stocks, which provides a sharp contrast after the sector’s poor performance last year. Top solar panel producers provided better-than-expected guidance for the rest of the year.
In the years ahead, the International Energy Agency believes that renewable energy could generate more electricity than nuclear reactors and natural gas powered utilities by 2016. [Solar ETFs Dazzle in the Second Quarter]
Over the second quarter, the worst performing non-leveraged ETFs include Market Vectors Junior Gold Minors (NYSEArca: GDXJ) down 49.5%, PureFunds ISE Junior Silver ETFs (NYSEArca: SILJ) down 48.1% and Global X Gold Explorers ETF (NYSEArca: GLDX) down 42.9%.
Next page: June performance
In June, the Dow was 1.7% lower, the Nasdaq was down 1.7% and the S&P 500 declined 2.0%.
The markets were largely stuck in sideways trading in the beginning of the month with no real positive or negative market indicators to push investors off the fence.
However, the lack of new stimulus from the Bank of Japan in mid-June fueled speculation that the Fed would begin tapering its easing plans and weighed on U.S. markets. After the FOMC announcement, traders started pulling out of risky assets as the markets believe the Fed will begin withdrawing stimulus when unemployment hits the 6.5% mark.
The fall in U.S. stocks was exacerbated by reports of tightening lending actions in China, which raised concerns over the world’s second largest economy.
After a downward revision to first-quarter GDP, investors returned to U.S. stocks, anticipating that the Fed will hold off on tapering.
The top performing non-leveraged ETFS over June include PowerShares Dynamic Networking Portfolio (NYSEArca: PXQ) up 2.7%, PowerShares DB US Deflation ETN (NYSEArca: DEFL) up 2.3% and SPDR S&P Bank ETF (NYSEArca: KBE) up 2.1%.
The networking and communications sub-sector held up, partly due to the growing global connectivity.
“Key secular themes of pervasive mobility, social Internet, and cloud computing continue to drive change throughout the technology and telecom sectors, while emerging trends such as big data and machine-to-machine computing will become increasingly important over time,” writes Peter Wahlstrom, CFA, director with Morningstar.
Over the past month, talks centered around the Fed winding down quantitative easing and a rising rate environment has instigated a deflation trade.
After the steep sell-off, financial stocks rebounded on economic data, like higher home prices and better durable goods orders, which pointed to a strengthening economy.
“New equity highs require higher rates to cause stronger economic growth (bank stocks are the best barometer of macro rehabilitation),” Michael Hartnett, chief investment strategist at Bank of America, said in The Globe and Mail. “In our view the ultimate macro ‘pain trade’ must be that Bernanke has not made a policy mistake but rather is ‘rotating’ away from Wall Street to Main Street via interest rate expectations. Higher rates and higher bank stocks would confirm this.”
The worst performing non-leveraged ETFs in June include PowerShares Global Gold & Precious Metals Portfolio (NasdaqGIDS: PSAU) down 17.5%, Market Vectors Coal ETF (NYSEArca: KOL) down 17.3% and ETS Silver Trust (NYSEArca: SIVR) down 17.0%.
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Max Chen contributed to this article.