By Kostya Etus, CFA – Co-Director of Research and Senior Portfolio Manager
“If you ain’t first, you’re last.”
– Ricky Bobby, Talladega Nights (2006)
As a movie lover, it’s my favorite time of the year: award season. With the Oscars right around the corner, I thought I would do a ceremony of my own and hand out awards for the top ETF performers of 2019 in various asset class categories. I’ll also offer my predictions for 2020 based on CLS Scores, a proprietary expected return measurement. And the award goes to…
Best Region: Xtrackers MSCI Eurozone Hedged Eq ETF (DBEZ) +29.4%
European stocks had one of their best years in a decade amid stabilizing economic growth, accommodative monetary policy, reduction in political uncertainties, and trade resolutions.
Note: The best performing MSCI region was actually Emerging Market Europe (+33%), but there is no ETF tracking that index… feel free to launch, issuers.
Runner Up: First Trust Latin America AlphaDEX® ETF (FLN) +26.3%
2020 Forecast: WisdomTree Asia Pacific ex-Japan ETF (AXJL)
Most countries within the region are attractively valued and may be beneficiaries in a period of growing commodity prices, resurgence of global economic growth, and progress on geopolitical issues such as the Hong Kong protests.
Best Country: Franklin FTSE Russia ETF (FLRU) +50.8%
The Russian market was driven by many factors, including four rate cuts from its central bank, reduced fear of sanctions from the U.S. and EU, a rebound in oil prices, and an increase in dividend yields to around 7% (relative to broad EM at 3% and the S&P 500 at 2%) – quite attractive in a low-interest-rate environment. Despite the outperformance, Russia remains attractive from a valuation standpoint.
Runner Up: Global X MSCI Greece ETF (GREK) +49.3%
It is interesting to note that, despite a strong year, the U.S. was only the ninth best-performing country at +31%.
2020 Forecast: iShares MSCI Mexico Capped ETF (EWW)
One of the most undervalued countries in the world, Mexico had a relatively weak 2019 due to a particularly weak economy and geopolitical concerns, but I believe it may rebound as some of those risks subside.
Best U.S. Multi-Factor: Invesco Russell 1000® Dynamic Multifactor ETF (OMFL) +35.7%
OMFL beat its peers and broad market-cap benchmarks due to its methodology of allocating to favorable factors based on market regime. Its well-timed moves included allocating to quality and low volatility in the first half of the year positioned for a slowdown regime and then transitioning to smaller size, value, and momentum for a recovery regime.
Runner Up: SPDR® MSCI USA StrategicFactors ETF (QUS) +32.4%
2020 Forecast: Schwab Fundamental US Large Company ETF (FNDX)
By utilizing the Research Affiliates fundamental screening, FNDX consistently tilts more towards value than some of the other multi-factor ETFs while still maintaining some quality attributes. Given that value is one of the most undervalued factors, and a quality tilt helps remove some falling knives, I believe this fund rises to the top when considering expected returns.
Best U.S. Single Factor: iShares Edge MSCI USA Quality Factor ETF (QUAL) +34.1%
Higher-quality companies (higher profitability and lower debt) were rewarded in 2019 due to high investor demand. The demand was driven by bullish investors who wanted a more defensive participation in the markets given the many geopolitical concerns over the year. I believe this has resulted in the quality factor being one of the most overvalued investments today.
Runner Up: Invesco DWA Momentum ETF (PDP) +33.2%
2020 Forecast: Deep Value ETF (DVP)
Given most other factors are trading at rich valuations and there is potential for a strengthening economy, a market rotation from high-flying growth stocks into value stocks may come sooner than later. DVP has one of the strongest value factor exposures in the universe, and I believe this gives a valued lover a good bang for their buck.
Best U.S. Style Box: Nuveen ESG Large-Cap Growth ETF (NULG) +39.3%
It is no surprise that large-cap growth wins in the Style Box category. The risk-on environment present for most of 2019 drove large growth companies to new highs, primarily driven by the well-known technology FANG stocks (which should really be expanded to FAANMG – Facebook, Amazon, Apple, Netflix, Microsoft, and Google).
Runner Up: MFAM Small-Cap Growth ETF (MFMS) +38.3%
2020 Forecast: Invesco S&P SmallCap 600® Pure Value ETF (RZV)
I believe this is the sweet spot in the Style Box as both small-caps and value stocks trade at dirt-cheap valuations and pair well together.
Best U.S. Sector: Technology Select Sector SPDR® ETF (XLK) +50.0%
The technology sector posted its best gains since 2009, driven primarily by rapid growth from Apple and Microsoft due to strong demand for new iPhones and cloud computing. Together, they represent a large portion of the sector (close to 40%) and accounted for nearly 15% of the S&P 500’s return in 2019.
Runner Up: John Hancock Multifactor Financials ETF (JHMF) +34.1%
2020 Forecast: Vanguard Energy ETF (VDE)
Share prices of energy companies have not kept up with oil prices or corporate earnings due to negative sentiment from global growth concerns and increased supply. A resurgence of global growth, as well as continued resolution on trade issues, should put the focus back on energy demand and help stock prices align better with oil prices and actual financial corporate results.
Best U.S. Industry: SPDR® S&P Semiconductor ETF (XSD) +64.6%
Technology hardware includes companies such as Apple Inc (+88%). Semiconductors include companies such as (NVIDIA +77%), and software includes companies such as Microsoft (+57%). But not all the best performers were technology companies; banks such as Citigroup (+57%) performed quite well, too.
Runner Up: iShares US Home Construction ETF (ITB) +48.9%
2020 Forecast: SPDR® S&P Oil & Gas Exploration & Production ETF (XOP)
I believe there is deep, deep value to be had in this industry, as deep as a well (pun intended), as this is a higher-beta play within the energy sector, making the upside potential that much more attractive.
BONUS Category – Best ETF Overall: Invesco Solar ETF (TAN) +65.7%
I am a big fan of ESG and clean energy and excited for the growth in this space as well as seeing more adoption from an investment management standpoint. That’s why it really “brightens up my day” to see TAN as the best performing ETF of the year!
This information is prepared for general information only. Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such. All opinions expressed herein are subject to change without notice. 0166-CLS-1/27/2020