The year 2015 began on quite a volatile note and in fact saw the worst start to the New Year since 2008. S&P 500's index fell 3.1% in January while the Dow lost 3.7% – marking its biggest monthly loss in a year.
Concerns about the impact of a stronger dollar and lower oil prices on corporate earnings growth continued to bother investors. Moreover, global growth uncertainty also played foul with both the World Bank and International Monetary Fund having slashed their global growth forecasts (read:Beat the Market with High Quality ETFs).
The three factors – oil, the strengthening U.S. dollar and lackluster global economic growth, worked in tandem pushing down corporate profitability for Q4 and the estimates for the current and subsequent quarters.
Meanwhile, the Swiss National Bank dropped its long-standing exchange rate of the Swiss franc against the euro adding to the current market volatility. At the same time, the political situation in Greece worsened as the Syriza party won the country’s general elections, raising worries about Greece’s exit from the eurozone.
On the other hand, news that the U.S. consumer sentiment rose in January to its highest level in 11 years on better job and wage prospects and consumer spending in the fourth quarter expanded at the fastest pace since 2006 failed to bring in the much needed relief to the U.S. markets. Adding to the woes, the U.S. economy expanded at a slower-than-expected pace of 2.6% during the final quarter of 2014. The pace signaled a slowdown in growth after an expansion of 5% in the third quarter and the 4.6% pace in the second.
Given the huge market volatility, ultra-safe bond funds emerged as one of the biggest winners in January as investors rushed in for safety. Not surprisingly, some of the commodity and oil & gas ETFs emerged as losers shedding in the double digits (read: ETF Asset Flow Roundup: Europe & Gold Gain, U.S. Lags).
Best ETFs
Volatility ETFs
Volatility ETFs were the major gainers amid the ongoing turbulence, as these tend to outperform when markets are falling or fear levels are high for the future. iPath S&P 500 VIX Short-Term Futures ETN (ARCA:VXX) has been leading the space with a 17% return in January, closely followed by 16.96% returns for VelocityShares Daily Long VIX Short-Term ETN (ARCA:VIXY) and 16.89% for C-Tracks Citi Volatility Index ETN (NYSE:CVOL).
VXX is the most popular volatility ETN on the market with an asset base of $937.7 million and average trading volume of 43.1 million shares. The fund tracks the S&P 500 VIX Short-Term Futures Index to provide exposure to a daily rolling long position in the first and second months of VIX futures contracts. The expense ratio came in at 0.89% (read Why I Hate Volatility ETFs).
Bond ETFs
Given the uncertainty in the global market, investors are flocking to safe haven in long-term government bonds to protect their portfolio from losses. PIMCO 25+ Year Zero Coupon U.S. Treasury Index ETF (NYSE:ZROZ), Vanguard Extended Duration Treasury ETF (NYSE:EDV) and iShares 20+ Year Treasury Bond ETF (ARCA:TLT) emerged as some of the biggest winners in this space gaining in excess of 9%.
ZROZ tracks the BofA Merrill Lynch Long US Treasury Principal STRIPS index and holds 21 securities in its basket. The effective maturity and effective duration of the fund stand at 27.38 years. The fund manages an asset base of $164.2 million and charges 15 bps in annual fees. ZROV has a 30-day SEC yield of 2.30% and is up 16% quarter-to-date (see: all government bond ETFs here).
iShares Residential Real Estate Capped ETF (NYSE:REZ)
In the current ultra-low environment, investors in search of juicy yields are continuing to pile up real estate funds which offer attractive payouts. The fund follows the FTSE NAREIT All Residential Capped Index and provides exposure to 37 U.S. residential real estate stocks and real estate investment trusts (REITs). REZ manages an asset base of $347.2 million with a 30-day SEC yield of 3.18% and has returned 8% in the past one month.
ETF Losers
SPDR S&P Metals & Mining ETF (ARCA:XME)
XME was the biggest loser last month dragged down by weakness within the broad commodity space. The fund lost 12.1% in January and is down 31% in the past one year (read: Mining ETFs Crumble on Copper Collapse).
XME is the largest and most popular fund in the metals and mining space with an asset base of $370.6 million and is highly liquid with an average trading volume of 2 million shares. The fund tracks the S&P Metals & Mining Select Industry Index to provide exposure to a basket of 35 stocks. The ETF charges 35 basis points a year.
SPDR S&P Oil & Gas Equip & Service (NYSE:XES)
The persistent decline in oil prices over the past six months has taken a toll on the overall energy sector as well as on the growth prospects of a number of oil producers.
XES tracks the S&P Oil & Gas Equipment & Services Select Industry Index providing exposure to a basket of 52 stocks. Sector-wise, Oil & Gas Equipment & Services occupies 72.3% of fund assets followed by 27.7% to Oil & Gas Drilling. The fund manages an asset base of $169.5 million and has lost 11.5% last month. The fund currently has a Zacks ETF Rank #5 or Sell rating.
First Trust ISE-Revere Natural Gas Index Fund (NYSE:FCG)
The fund offers exposure to the U.S. stocks that derive a substantial portion of their revenues from the exploration and production of natural gas. It follows the ISE-Revere Natural Gas Index and holds 28 stocks in its basket, which are well spread out across each component with none holding more than 7% of assets. The fund has gathered an AUM of $240 million so far and sees good average daily volume of over 1.3 million shares. The fund has shed 10.5% in January and currently has a Zacks ETF Rank #5 or Sell rating.