ETFs focused on emerging markets, specifically Russia and China, along with a slew of volatility-related exchange-traded products are among the worst-performing ETFs in the first half of 2014.
Escalating tensions and violence between Russian and pro-Ukrainian forces have resulted in dismal performances for Russia-focused ETFs, especially for the Market Vectors Russia Small-Cap ETF (RSXJ | D-31), which dropped 17.8 percent through the first half, according to ETF.com’s data screener.
However, investors such as Mark Yusko, chief investment officer of Chapel Hill, N.C.-based Morgan Creek Capital Management, said in a recent interview with ETF.com he’s not deterred by Russia’s saber rattling in Ukraine.
Instead, he’s finding pockets of “interesting and cheap opportunities” in both Russia and China, which currently have their own economic and geopolitical issues to deal with.
Still, China, the world’s second-largest economy, is in the midst of trying to transform itself from having an export focus to being a more consumption-oriented economy. It’s also dealing with a slowing economy and escalating geopolitical tensions with neighboring countries such as Vietnam and the Philippines over exclusive rights to maritime territory in the South China Seas that includes petroleum reserves.
As a result, China-focused ETFs have underperformed to date, led by the Market Vectors ChinaAMC A-Share ETF (PEK | F-48), which invests in mainland China securities. The ETF is down 13.5 percent through the first half.
While some investors such as Yusko see value in China, others, including James McDonald, chief investment officer of Index Strategy Advisors, said he’s not buying into the lure of mainland China securities and the ETFs that are offering investors access to these markets.
“Introducing products to access previously inaccessible markets is a positive trend, but we’re still manufacturing picks for a mine that has no gold in the ground,” said McDonald in a recent interview with ETF.com.
“If the new funds do what they say they’re going to do, they’ll still lose money because their indexes are composed of sectors that are under pressure and have low investor demand,” he added.
Volatility Falls, As Do Volatility ETNs
As noted, ETPs focused on volatility that are more heavily used by traders than retail investors have also had a rough go of it in the first half of 2014.
After all, the S'P 500 Index has returned about 6 percent year-to-date and has reached new highs, after surging 32 percent in 2013.
The C-Tracks Citi Volatility ETN (CVOL | D-49) led all underperforming volatility ETNs, dropping about 57 percent through the first half.
Chart courtesy of StockCharts.com
Robert Whaley, who developed the CBOE Market Volatility Index for the Chicago Board Options Exchange in 1993, as well as the Nasdaq Market Volatility Index in 2000, expressed shock over volatility-based ETNs at ETF.com’s Global Macro ETF Strategist conference in New York last week.
Whaley said volatility-focused ETNs were hardly appropriate as investment vehicles, as they are almost always perennial losers. They perform especially badly when volatility is dropping, as it has in the past year.
But they remain favored by traders who use them as speculative instruments or as short-term portfolio “insurance” as they do rise in value when the stock market declines sharply. The VIX index is currently at 11.32, closer to the 52-week low of 10.34 than the 52-week high of 21.48.
|Ticker||Fund||Issuer||First Half 2014 TRR (%)||First Half 2014 AUM ($, M)|
|CVOL||C-Tracks Citi Volatility ETN||CitiGroup||-56.76||5.88|
|VIXY||ProShares VIX Short-Term||ProShares||-32.84||104.84|
|VIIX||VelocityShares VIX Short Term ETN||VelocityShares||-32.59||7.57|
|VXX||iPath S'P 500 VIX Short-Term Futures ETN||Barclays Capital||-32.43||1,221.79|
|VIXM||ProShares VIX Mid-term||ProShares||-18.87||41.31|
|VIIZ||VelocityShares VIX Mid Term ETN||VelocityShares||-18.58||1.61|
|VXZ||iPath S'P 500 VIX Mid-Term Futures ETN||Barclays Capital||-18.58||39.01|
|RSXJ||Market Vectors Russia Small-Cap||Van Eck||-17.78||58.50|
|PEK||Market Vectors ChinaAMC A-Share||Van Eck||-13.54||23.42|
|STPP||iPath U.S. Treasury Steepener ETN||Barclays Capital||-11.06||20.68|