Earlier this week, we published a story on the top-performing exchange-traded funds of the year through the third quarter. Outside the leveraged and inverse space, there weren't a lot of ETFs that were in the green for the year, and the threshold for making the list wasn't very high.
For example, the WisdomTree Japan Hedged SmallCap Equity ETF (DXJS | C-61) took the last spot on the list, with "only" a 9.6 percent return.
Today, as we look through the worst-performing ETFs of the year, it's clear the threshold for making this list is much higher (or lower, depending on how you look at it). Each of the bottom 10 ETFs (excluding inverse and leveraged funds) of 2015 were down by more than 45 percent through the third quarter, and there were plenty that didn't make the cut that lost more than 40 percent of their value.
Natural Gas Tanks, GAZ Remains Broken
Garnering the unlucky distinction as the worst ETF of the year is the iPath Bloomberg Natural Gas Subindex Total Return ETN (GAZ | F-42). The problems for GAZ this year have been twofold. The most obvious is the drop in the price of natural gas.
Natural gas lost 12.6 percent of its value during the first nine months of the year, hitting the lowest levels in three years. Combine that with the ill-effects of roll costs from contango and it was bound to be a bad year for GAZ, which tracks front-month natural gas futures.
However, that's not the whole story. The more popular exchange-traded product that provides exposure to natural gas―the United States Natural Gas Fund (UNG | C-100)―was only down 21.4 percent in the same period that GAZ was down nearly 54 percent.
The difference comes from the closing of the gap between GAZ's market price and its net asset value. At the start of the year, GAZ was trading at a 37 percent premium to its NAV.
GAZ Vs. NAV
Ever since issuer Barclays suspended new issuances of the ETN, GAZ has periodically traded at big premiums to its NAV. That's prompted a litany of warnings from Barclays itself about the dangers of its product. The latest came in January, when it said that "due to likely continued fluctuations in this premium, Barclays believes that the ETNs are currently not suitable for most investors..."
Barclays went on to say that "investors should not assume that the ETNs will continue to trade at a premium in relation to their intraday indicative value."
That turned out to be a good piece of advice. By March, GAZ's premium to its NAV had completely disappeared, and the ETN has largely tracked NAV since then. However, there's nothing to say that the premium may not return down the line as long as Barclays keeps the door on new issuances closed. That effectively makes GAZ a broken product, and one much inferior to the aforementioned UNG.
Other Energy Losers
GAZ wasn't the only natural-gas-focused ETF to suffer this year. The First Trust ISE-Revere Natural Gas ETF (FCG | B-98) followed closely behind, with a 48.9 percent plunge so far this year. FCG is an equity-based ETF that tracks an equal-weighted basket of natural gas producers.
FCG's equal-weighting scheme gives it a greater focus on smaller companies compared with other energy ETFs. When times are tough in the industry, as they have been this year, small firms get hit especially hard.
That's the same reason another energy fund, the PowerShares S&P SmallCap Energy ETF (PSCE | B-27), also made the list, with a 45.7 percent loss. PSCE has an even smaller tilt than FCG, though it offers broader energy sector exposure, with the inclusion of oil producers and service companies.
The final energy fund in the top 10 list is the Market Vectors Coal ETF (KOL | C-3). Competing head-on with natural gas in the electric power sector, coal has suffered severely. Utilities have increasingly shifted toward burning natural gas at the expense of coal, due to cheap prices and the latter's reputation as a dirty fuel.
In fact, the entire U.S. coal industry is on the verge of bankruptcy. Top producers like Peabody Energy and Arch Coal were forced to reverse-split recently after shares of the companies fell below $1.
Fortunately, KOL has a wider reach than just the U.S., and relatively stronger markets in Asia (where natural gas prices are much more expensive) have prevented the ETF from plunging even more.
Along with energy, another commodity sector that made an appearance on the bottom-performers list was metals. The First Trust ISE Global Platinum ETF (PLTM | F-97) and the SPDR S&P Metals and Mining ETF (XME | A-64) plummeted by more than 45 percent.
Platinum and PLTM (which holds producers of the metal) have been reeling from slumping auto sales in China, which is used as an autocatalyst. XME—which has heavy exposure to steel, aluminum and coal producers—has likewise been hurt by the broader slowdown in China's economy.
While commodities certainly earned their place in the worst-performing ETFs list, this article wouldn't be complete without a mention of Brazil. Three Brazil funds were in the bottom 10: the Market Vectors Brazil Small-Cap ETF (BRF | D-67), the iShares MSCI Brazil Small-Cap ETF (EWZS | C-97) and the EGShares Brazil Infrastructure ETF (BRXX | F-23).
China has dominated the headlines in 2015, but of all the emerging markets, it has been Brazil that has fared the worst this year. Political turmoil, surging inflation, a crumbling currency and a deep recession are just some of the issues facing South America's largest economy right now.
It's uncertain whether the worst has been priced into Brazil ETFs, but value hunters surely have their eyes on the country after the recent bloodbath. In fact, the YTD returns don't tell the whole tale. From their peak levels, many Brazil ETFs are down 70 to 80 percent.
|GAZ||iPath Bloomberg Natural Gas Subindex Total Return ETN||-53.75|
|BRF||Market Vectors Brazil Small-Cap||-48.97|
|FCG||First Trust ISE-Revere Natural Gas||-48.86|
|EWZS||iShares MSCI Brazil Small-Cap||-48.81|
|BRXX||EGShares Brazil Infrastructure||-46.47|
|IDXJ||Market Vectors Indonesia Small Cap||-45.97|
|PSCE||PowerShares S&P SmallCap Energy||-45.71|
|KOL||Market Vectors Coal||-45.67|
|PLTM||First Trust ISE Global Platinum||-45.46|
|XME||SPDR S&P Metals and Mining||-45.23|
Contact Sumit Roy at email@example.com.
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