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In this review of the best ETFs of the first quarter of 2015, we won’t be looking to chase after short-term trends. Instead, we’ll dig beneath the surface of high returns to see what clues and insights we can find about the coming quarters.
If anything, some investors may consider locking in gains on their biggest winners by selling shares, or they may recognize areas that are overbought and steer clear of them.
Also, we won’t just look at the best ETFs purely on performance basis. This is because the biggest gainers (and usually the biggest losers) of any given calendar quarter are usually the highly leveraged and inverse ETFs.
Instead, I’ll provide the top performers in three general equity groups: region, sector and capitalization.
Best ETF of Q1 2015: Region
The top performing region by far was the Pacific Rim, specifically the nations of China and Japan.
As a result of investor enthusiasm, the top performing regional ETF in Q1 2015 is Market Vectors China (NYSEArca: CNXT), which jumped 48.6% in the quarter. Investors have been buying up shares of China stocks because the People’s Bank of China (PBOC) has instituted an easy money policy in an effort to keep lending rates low and economic growth strong. Investor caution is warranted here, but the PBOC appears ready for further easing, if necessary, to keep China’s economy humming.
Japan’s Nikkei 225 index ended Q1 above 19,000, which is a high point the Japan stock index has not seen in 15 years. Japan’s currency, the yen, is trading at multiyear lows against the U.S. dollar. This has helped pump up the profits for Japanese exporters, such as Toyota Motor Corp. (NYSE: TM), which was up 11.5% in the first quarter.
Best ETF of Q1 2015: Sector
Market watchers won’t be surprised to hear that the best sector for the first quarter was biotechnology, which is actually a sub-sector of health care.
The top performing biotech ETF for Q1 was SPDR S&P Biotech ETF (NYSEArca: XBI), which had a leap in price of 21% for the quarter. A key takeaway here is that the smaller-capitalization stocks vastly outperformed the large caps.
This tilt toward smaller-cap, early-stage biotech firms produces uncertain prospects but powerful upside potential. In fact, according to Morningstar, almost half the names in this ETF are companies with no drug on the market yet.
Could biotech be in a speculative bubble like that of the dot-com bubble of the late 1990s?
Best ETF of Q1 2015: Capitalization
Helped in part by biotechnology, small-cap stocks outperformed both mid- and large-cap stocks in the first quarter.
The top performing small-cap ETF in Q1 was Guggenheim S&P SmallCap 600 Pure Growth ETF (NYSEArca: RZG), which had an impressive price gain of 10% for the quarter, compared to 1% for the S&P 500 index.
Top sectors in this ETF include health care, technology, consumer cyclicals and real estate – all of which were market leaders in the first quarter of 2015.
Small-cap stocks in general are also enjoying a nice bounce off of a mild 2014, when the Russell 2000 small-cap index climbed only about 5%, compared to more than 13% for the S&P 500.
Perhaps a key takeaway from all three of these year-to-date 2015 top performers is that investor risk appetite is strong. But the second quarter and the remainder of 2015 could be an entirely different story if the fundamentals or narratives change on these high-flying, possibly overbought stocks.
As of this writing, Kent Thune did not hold a position in any of the aforementioned securities.
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