By Viktor Argonov, Senior Analyst at International Investment Firm
Exchange-traded funds (ETFs) and similar instruments such as exchange-traded notes (ETNs) have typically been the best strategies for long-term investment. Even generic funds such as SPY (which tracks the S&P 500 index) earned investors an average annual return of 10-11% since mid-20th century. An even greater revenue (around 15%) can be earned from specialized funds such as RPG, whose basket only includes stocks from companies with high growth rates.
However, COVID-19 has changed this. The indices plummeted in February and March, and, even though they have mostly recovered by now, they have not earned their investors significant profits yet. On the other hand, the pandemic has also caused the stock prices of many companies to rise, as the demand for their products increased. This was true of some ETFs as well, as they turned out to be much more profitable than the more typical ETFs such as SPY.
All the data in this article is current as of June 25, and the ratings are based on the etf.com database.
Fear Can Be Profitable
The most successful funds since the beginning of this year have been those that track the VIX index. This is the Chicago Board Options Exchange (CBOE)’s volatility index, also often referred to as the fear index. The assets’ volatility increases uncertainty, and makes the investors fear unexpected changes. In such a situation, the market’s participants try to hedge themselves against any significant change in asset price, in either direction. One of the common means of hedging is through options, and this causes premiums to grow for both put and call options. The value of these premiums is what the VIX index reflects. Although the index is linked to the CBOE, it is also inextricably tied to the volatility of many assets from different exchanges – from gold to large stock portfolios, reflected in indices such as S&P 500 (500 largest companies in the US), Dow Jones (30 largest companies), and so on.
While the VIX was at 13-15 in mid-February, by mid-March it shot up to nearly 83 (out of 100). Currently it stays within the 30-40 range. Those who bet on the index growing made a serious profit. Let us list some successful funds tied to the VIX. The total increase in asset prices for the fund since the beginning of the year is given in parentheses.
- UVXY (+161%). An ETF from the ProShares company. Correlates strongly with the dynamics of the VIX index itself. Both were at their maximum in March, and both have decreased significantly since then, but they still greatly exceed their pre-crisis values.
- TVIX (+157%). An ETN from the VelocityShares company. Reflects the dynamics of short-term futures contracts on the VIX. Just like with UVXY, the dynamics of TVIX correlate greatly with the dynamics of the VIX itself.
- VXX (+128%). An ETN from the iPath company. Like the previous fund, it is linked to the prices of short-term futures contracts on the VIX, and correlates greatly with the dynamics of the VIX.
- VIIX (+128%). Another ETN from VelocityShares. It tracks the dynamics of the S&P 500 VIX Short Term Futures ER (SPVXSPID), which is, once again, tied to short-term futures contracts on the VIX. Like the other funds listed here, its dynamics roughly follow the dynamics of the VIX, although the peak in March was less pronounced for this fund.
It should be pointed out that all of these funds showed the best results when calculated over the last half-year period, while over the last 1-3 months the results were far more modest, or sometimes even negative. The main reason why they did so well was due to the mass sale of assets in March. The greatest profits were gained by those who invested in these funds before the start of the pandemic. Currently, however, the above funds are probably not going to be a particularly profitable investment, since the level of uncertainty that was seen in March is unlikely to be seen again, even in the event of a second wave of the outbreak.
It should be noted that in March there was enormous uncertainty over the pandemic. Nobody knew yet how strict the quarantines needed to be, how long they were going to last, what measures the governments were willing to take to support the people, and what kind of restrictions they were capable of enforcing. Other unknown variables the likelihood of reinfection, the percentage of asymptomatic carriers, and how this percentage changed with quarantine measures in effect. Today our knowledge of COVID is much more extensive, and that is why the populace acting more boldly now, as well as why the stock market is recovering. Because of that, one should not take the above list of funds as investment tips. Rather, these are examples of funds that were affected positively by the pandemic.
Investing in Natural Resources Can Also Be Good
In the spring, we witnessed a colossal oil crisis caused by the worldwide drop in oil consumption and the OPEC+ scandal. In March, the price of Brent oil dropped from over $50 to $20 per barrel. The April agreement to reduce oil production by 9.7 million barrels per day has already managed to bring the oil price back to around $40, but a further price increase may turn out to be slower.
The investors that bet on oil prices going up at the beginning of the year have suffered losses. However, some commodity funds have shown great results. Some of them have circumvented the crisis by betting on the market crashing rather than growing. However, some funds that bet on the growth of the mining sector also show good results.
- SCO (+45%). An inverse oil ETF from ProShares. It was at its maximum in March and April, and is now falling due to oil prices growing. Even in mid-June, its rate of return since the beginning of the year was over 70%.
- DGAZ (+128%). An inverse gas ETN from VelocityShares. Since the gas prices are falling considerably now, this fund currently gives much better returns than SCO.
- KOLD (+91%). An inverse gas ETF from ProShares. Like DGAZ, this fund is still giving positive returns after March.
- GRNTF (+75%). An ETN from iPath that invests in coal mining worldwide. Unlike SCO, this fund remains highly profitable after the disaster in March. Nearly all of the 75% growth given here happened during the last three months.
Online Services and High-Tech Business in General
Even though this is the investment path that was supposed to give maximum returns, it is still only third in our rating. The most successful funds here have only shown a rate of return around 70%, which is a great deal less than for the funds that “profit on fear”. However, the asset prices for the funds listed in this section did not go down after March, and they are still increasing.
- FNGO (+61%). An ETN from the Bank of Montreal. Invests in the high-tech companies on the NYSE FANG+ index, which, aside from companies on the NYSE, also includes other top companies, such as Netflix (NFLX), Microsoft (MSFT), Facebook (FB), and others. These companies turned out to be quite popular for online work and entertainment. In June, FNGO set a new historical record of its asset prices, although it has been slightly adjusted since.
- CLIX (+50%). An ETF from ProShares. Specializes in online stores. Currently, CLIX’s asset prices are at their all-time maximum, and new records are set regularly.
- FNGU (+70%). Another ETN for the FANG+ index from the Bank of Montreal. The main difference between FNGU and FNGO is in the coefficients that the ETNs use to track the indices – 3 and 2 respectively. The FNGU asset prices were at their all-time maximum in February, but these records are expected to be updated soon.
- WCLD (+52%). A fund from the WisdomTree company. Specializes in cloud computing technology. Like the CLIX fund, the WCLD is regularly setting new records for asset prices at the moment.
What About the Classic ETFs?
For comparison, let us see the rates of return shown by the more popular funds – in particular, the generic US SPY fund, the US “blue chip” DIA fund, the RPG fund that tracks growing companies, and the RPV fund that tracks mature, moderately rated companies.
- SPY (-5%). The world’s most popular ETF from Standard and Poor’s Financial Services. As it follows the S&P 500 index (500 leading companies of the US), it experienced a serious crash in February and March, but then it started to recover, and has nearly recovered its pre-crisis standings since. However, it still has a negative rate of return since the beginning of the year.
- DIA (-10%). Another ETF from Standard and Poor’s Financial Services. It is not as popular as SPY, and less diverse, as it follows the Dow Jones index (30 leading companies of the US). Due to the colossal size of these companies and their occasional cooperation with the American government, it often shows better results than SPY. However, this does not hold true for the current situation.
- RPV (-33%). An ETF from the Invesco company, which invests in the most well-established companies on the S&P 500 index. These are typically companies with relatively low ratings and good dividends. Investing in these companies typically pays off much more quickly than investing in overrated, hyped startups. However, it was traditional business, including major enterprises, that was hit the hardest by the pandemic.
- RPG (0%). Another ETF from Invesco, filling a different niche. It also selects companies on the S&P 500 index, but, rather than picking old, well-established companies, it tracks quickly-growing companies that are often overrated and pay no dividends. Although growing turnover and profits for the last 5 years may not always mean the company continuing to grow in the next year, this fund is currently coping with the crisis well.
This means that the most popular ETFs no longer seem to be in a catastrophic situation – some have already broken even (or about to do so) compared to the beginning of the year. However, one should still remember that the SPY and the DIA are not the only ETFs available on the market. There are more profitable funds around, and it is just a matter of finding one.
The returns from the high-tech funds that gained popularity due to the pandemic are still lower than the returns from funds that grew precisely because of the disasters on the stock and commodity markets. However, there is a long-term advantage to investing in cutting-edge technology companies and funds. Their success does not depend on constant panic from investors and consumers. Funds like CLIX and WCLD continue to grow, while the funds that “hit the jackpot” on investors’ confusion in March or the crash of the commodity prices are losing ground as the tension subsides. The technological innovations that were introduced during the pandemic will most likely find some use afterwards as well. It is the high-tech ETFs listed in this review that are perhaps the best choice for long-term investment.