The energy sector has provided an excellent example of this. Given what has happened in the space lately, it shouldn’t come as too much of a surprise that there isn’t a single energy equity ETF (as classified by Morningstar) with a positive five-year return. There are a few smart beta and factor options in energy, and their results have been less-than-stellar; granted, it has been a turbulent time.
This is shown below using up and down capture ratios. Market cap exposure, proxied by the Energy Select Sector SPDR (XLE), has mitigated the most downside risk in the space and also held up well in bullish periods, outperforming over the time frame. It could be construed that if there were low- or minimum-volatility options available in the energy space, they have been the outperformers – however, they may have also lagged during stronger periods.
Smart beta and factor ETFs deserve a place – often a very large place – in many portfolios. However, at times, beta (market cap exposure) can be a smart decision. It is important to remember, particularly as factor and smart beta ETF options expand, ETFs are arrows in the quiver, if you will, for ETF strategists to use to allocate client portfolios. Sometimes, the best ETF to use may have been launched over 15 years ago. I have a feeling, however, that it won’t be long before more robust factor and smart beta options are available at the sector level.
Grant Engelbart is a Portfolio Manager at CLS Investments, a participant in the ETF Strategist Channel.
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