The stock market had an amazing year in 2017, with the S&P 500 increasing more than 19.9%, but some Exchange Traded Funds performed substantially better. Most investors wouldn’t expect a large fund to outperform the S&P 500, unless they were using leverage, taking on outsized risk through trading in volatility, or investing entirely in international/developing markets.
But, surprisingly there were a few ETF’s that not only outperformed the S&P 500 but crushed it while just being mildly risky. Below is a list of a few of them and then an explanation as to why they performed well and whether or not their hot streak can continue in 2018.
While this list was intended to help investors find ETF’s which offered lower risk than one would find with leveraged ETF’s, the best performer still had a little more risk than most investors should be comfortable with. The outsized risk with ARK WEB x.0 ETF (ARKW) is that its largest holding is in the Bitcoin Investment Trust (GBTC), which makes up 6.71% of the fund. The next largest is Amazon.com (AMZN) making up 6.08% of the fund. Twitter (TWTR), Athenahealth (ATHN), 2U (TWOU), Tesla (TSLA), Netflix (:NFLX), NVIDIA (NVDA), Alphabet (GOOG)(GOOGL), and JD.com (JD) round out the fund top ten holdings. GBTC’s performance in 2017 was primarily the reason ARKW crushed the overall market, but moving forward investors shouldn’t bet on that continuing to happen.
Ever since the Bitcoin futures began trading on the CBOE and CME, the price of Bitcoin has stabilized. If you are considering buying ARKW, just know that you are taking on more risk than a typical ETF due to its exposure to Bitcoin, but maybe that is why you want to own ARKW. Personally, though if I were thinking about investing in Bitcoin, I would just invest directly into the crypto-currency, not muddy the waters with GBTC due to its pricing.
VanEck Vectors Rare Earth/Strategic Metals ETF (REMX) is an ETF that focuses on global companies who refine or recycle rare earth and strategic metals. While ARKW has 88% of its assets in U.S. based companies while REMX only has 8.55% of its assets in domestically based companies, making it the ETF with the lowest exposure to U.S. based companies in this list. But, the upside is that the fund has the most exposer Australian based companies, which represents 29% of the fund's assets. One other downside to the fund is that it only owns 19 stocks, with its top ten holdings making up nearly 60% of the ETF.
Moving forward if the world economies continue to grow, REMX should perform well. But if we witness a global slowdown, REMX will likely take a hit since global expansion increases demand for rare metals while contraction is reducing demand for these particular compounds.
Despite the name EMQQ Emerging Markets Intrnt & Ecmrc ETF (EMQQ) still had 26.6% of its assets in U.S. based companies, second to China at 29%. Furthermore, all of the stocks found in the fund are exclusively listed in the U.S. EMQQ invests in online shopping, e-commerce, and gaming stocks which also adds a layer of protection since most emerging market countries don’t have a significant presence in these industries. Moving forward EMQQ does appear to have more room to grow since some of its top holdings still show great promise for the future; Tencent (TCEHY), Alibaba (BABA), Baidu (BIDU), JD.com, and Mercadolibre (MELI) to name a few.
And finally, we have Global X Lithium & Battery Tech ETF (LIT). This ETF has 45% of its assets in U.S. based companies and saw the substantial increase in its value due to the increased demand for Lithium batteries in 2017. As we continue to see the explosion of electric power vehicles, the demand for lithium will also only increase. Based on that thinking LIT seems like a no-brainer moving forward and while it is to some extent, investors need to be cautious since the funds top ten holdings represent 75% of its assets despite owning 35 different companies. Furthermore, the top two holdings represent 35.45% of the assets. If Albemarle (ALB) or FMC (FMC), representing 18.75% and 16.7% of the fund respectively, take a turn for the worse in 2018, LIT investors would certainly feel the pain.
At the end of the day, it's hard to find outsized returns unless you take on a little more risk. The problem with this strategy is that you may not be able to afford the increased risk in your portfolio based on your investment profile. But, if you can take on that additional risk, with even just a small amount of your investable assets, sometimes it can pay off.
Matt Thalman
INO.com Contributor - ETFs
Follow me on Twitter @mthalman5513
Disclosure: This contributor held long positions in Amazon.com, Alibaba, Tesla, Mercadolibre, Netflix, Twitter, and Alphabet at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
