If you've been wondering how you could have made more than the sub-1 percent return generated by the S&P 500 in the first quarter, here's your answer: You should have been buying biotech and health-care funds.
In the first quarter, 10 of the top 20 best-performing mutual funds have been health care-related, according to Morningstar. Seven of the top 20 exchange-traded funds have also been in the health-care space-mostly biotech and pharmaceuticals-according to First Bridge Data, an ETF data and analytics company.
"Health care has been the place to be for the last few years," said Russel Kinnel, Morningstar's director of manager research. "There's been a lot of mergers and a lot of excitement around biotech, and you're continuing to see that."
The best-performing health-care fund is Fidelity's Select Biotechnology Portfolio (NASDAQ:FBIOX-O), which, according to the company, invests at least 80 percent of its assets in businesses that are engaged in the "research, development, manufacture, and distribution of various biotechnological products." The fund has returned 18 percent year-to-date as of March 31.
Investing in Japan was the other big outperformer among fund investing themes in the first quarter, with 5 of the top 20 mutual funds tracking Japanese stocks.
The Matthews Japan Fund (NASDAQ:MJFOX-O), a fund that invests at least 80 percent of its assets in common and preferred shares of Japanese-based companies, is also up 18 percent as of March 31.
Why the outperformance? The country has been undergoing economic reforms, including a quantitative easing program, which helps support stock prices and depreciates the yen-it's down 14 percent over the last 12 months, and that helps exports. Lower oil prices are also a boon for the country, as it's an oil importer.
While leveraged exchange-traded funds were excluded from this data set, taking double the risk on Japan in the first quarter would have paid off. The Rydex Japan 2x Strategy Fund (NASDAQ:RYJSX-O) returned 25.5 percent. It offers 200 percent exposure to the Japanese stock market.
The top-performing fund ETF was the Market Vector's ChinaAMC SME-ChiNext ETF (NYSE Arca: PEK), tracking the 100 largest and most liquid stocks from the Shenzhen Stock Exchange's small- to mid-cap universe. The ETF is up 47 percent since January-in part because it's one of the only ETFs to take advantage of China's A-Shares market, which only opened to foreign investors in November. The ETF itself was created last July.
"It's a rare opportunity to get into the A-Shares market," said Jeff Tjornehoj, head of Americas Research for Lipper. "There really aren't many funds that tap into these stocks."
Two other trends that Kinnel thinks have been important this year is that small-cap funds, by and large, are outperforming large-cap ones, and growth is outperforming value. The fifth best-performing mutual fund, the Jacob Small Cap Growth Fund (NASDAQ:JSCGX-O), taps into both themes.
The fund, which buys into early stage small-cap companies that it thinks have growth potential-Jacob Asset Management came to prominence with one of the first Internet mutual funds in the late '90s-is up 15 percent.
On average, small-cap growth funds are up 4.84 percent year-to-date compared to 3.31 percent for large-cap. The S&P Small Cap 600 returned 3.6 percent in the first quarter, and the S&P 400 index rose even more, 4.9 percent, both ahead of the S&P 500's 0.4 percent gain. That's a reversal from 2014.
"Small-caps were hurting last year," he said. "They could be doing better because they're bouncing off their lows, so there was a value correction, and now we're seeing a rally. There's some biotech in the small- and mid-cap growth category, too, so that's probably helping."
Interest in overseas equities-which have become more popular as many investors think the U.S. market is overvalued -has led to a surge for currency-hedged equity funds. In the top 20 best-performing ETFs, there are seven currency-hedged portfolios-three German ones, three broad European equity funds and a Japan-hedged health-care fund.
With the U.S. dollar rising against nearly every currency, investors are worried about losing money on foreign investments. By buying hedged products, they can get market returns without worrying about currency ups and downs impacting their portfolio, said Aniket Ullal, First Bridge Data's founder.
"People are wondering how they can stay invested in Germany but not suffer the consequences of a decline in that local currency," he said.
There's no guarantee that what's topping the list so far will lead the pack at the end of the year. Most of the ones in the top 20 are sector-, country- or trend-related-you rarely see a balanced fund on the list.
These funds do well when a sector or trend is hot, and they do worse when that idea goes out of fashion. If you think biotech will continue to do well, then you could make a bet on the sector. If not, then stay away. There has in the least been some profit-taking from biotech stocks in recent days, if not a bearish call after its big run: the Nasdaq biotech stock index is down near-8 percent in the past five trading sessions, and biotech was the biggest loser among market sectors on the first trading day of the second quarter.
"It's just a question as to whether these sectors and countries continue to rotate through the year or not. Sometimes that rotation is shorter, and sometimes it's longer," Morningstar's Kinnel said. "The most important thing to do is to build a good portfolio and buy low and sell high."
-By Bryan Borzykowski, special to CNBC.com
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