Finding some of the worst non-leveraged exchange traded funds this year is not difficult. Not when the S&P 500 is up 29.3% and so many broad market, sector and industry funds are sporting gains in excess of that.
In others words, the worst losers really stick out and this year, that means commodities ETFs. Specifically, precious metals funds. Of the 10 worst-performing non-leveraged ETFs to this point in 2013, all are commodities plays, nine of those are related to precious metals and six of those nine are equity-based funds. [Negative Sentiment Rising for Mining ETFs]
There is a school of thought that buying one year’s worst performers can pay-off handsomely the following year. Think of it as buying fear. “Believe it or not, the end of 2013 is much like recent years as fear is mounting in some unpopular sectors,” writes Larry McDonald for Forbes, highlighting such unloved sectors as gold miners, coal producers and rare earths miners.
Of the three major ETFs tracking those groups, the Market Vectors Coal ETF (NYSEArca: KOL) is this year’s “best” performer with a loss of 19.3%. The Market Vectors Rare Earth/Strategic Metals ETF (NYSEArca: REMX) is off 31.3% and was reverse split earlier this year and the 54.3% slide for the Market Vectors Gold Miners ETF (NYSEArca: GDX) is nothing if not well-documented. [Another Troubling Day for Mining ETFs]
In terms of 2014 potential for those ETFs, McDonald makes an important and accurate point that in 2011 financials were dogs and solar stocks followed suit last year. The Financial Select Sector SPDR (NYSEArca: XLF) lost 17.1% in 2011 before gaining 28.4% in 2012. XLF is up 32.5% this year.
The Guggenheim Solar ETF (NYSEArca: TAN) and the Market Vectors Solar Energy ETF (NYSEArca: KWT) both lost more than 30% last year and both were reverse split. This year, TAN and KWT are two of the best non-leveraged sector ETFs.
As for this year’s beaten down trio, KOL seems like a good candidate for a 2014 bounce. The Chinese economy is steadying. So is India and natural gas prices are on the rise. In the past three months, the U.S. Natural Gas Fund (NYSEArc: UNG) is higher by 10% and higher gas prices often benefit coal producers. KOL is already showing signs of life and is up 2.1% since Nov. 20. [Resources ETFs Coming Back From the Dead]
The situation with GDX and any comparable ETF is more murky. Yes, it can be said that ample bad news is priced into gold mining stocks, but other questions need to be answered. First, will gold prices rise next year? Second, have investors forgotten that when spot gold rose in 2011 and 2012 mining stocks and ETFs still declined? Third, how deep will tax-loss selling be? [Tax-Loss Selling Could Plague Mining ETFs]
Fourth, how many more investors are willing to keep dollar-cost averaging into gold mining ETFs? After all, GDX has seen INFLOWS of $2.4 billion this year. Some big-name hedge funds have also been reluctant to unload losing mining trades.
In what may a positive sign for mining bulls, McDonald notes that the corporate bonds of some gold miners have been perking up, and since credit leads equity, that could be good news for the miners.
Market Vectors Coal ETF
