Our Top- and Bottom-Performing ETFs of 2016
At the end of 2016, WisdomTree had 94 U.S. listed exchange-traded funds (ETFs) focused on markets around the world. Knowing which performed the best and worst over given time frames can provide valuable insight for investors.
• The Worst Performers offer insight into what could be some of the more contrarian ideas out there, additionally providing opportunities for potential mean reversion if, in fact, these strategies can rebound.
• The Best Performers offer insight into where the more recent momentum has been stronger. If the catalysts for stronger performance are believed to be sustainable, there may be investors who want to take advantage of the ongoing trends.
Average Annual Returns for WisdomTree’s Best & Worst Performing ETFs in 2016
WisdomTree’s Best & Worst Performing ETFs of 2016
Searching for Mean Reversion Potential among 2016’s Worst Performers
• Japan: The WisdomTree Japan Hedged Financials Fund (DXJF) and the WisdomTree Japan Hedged Health Care Fund (DXJH) stand out as the two worst-performing ETFs at WisdomTree in 2016. In the case of DXJF, the full-year performance of -7.25% masks one of the most volatile years we’ve seen across global equity markets in some time. For example, DXJF was down approximately 40% from December 31, 2015, to July 8, 2016, but then it was up approximately 55% from July 8, 2016, to the end of the year.1 If people believe in the 1) continued interest rate divergence between the United States and Japan and 2) Japan’s policies of quantitative easing and fiscal stimulus, then it’s quite possible that DXJF can continue to perform well.
• China’s Currency vs. the U.S. dollar: It’s important to note that the Chinese government is still managing its exchange rate, but it is no longer doing it chiefly to the U.S. dollar, instead utilizing a basket of currencies that represents China’s major trading partners. However, it’s notable that the onshore renminbi had one of its worst years (down 6.50% vs. the U.S. dollar) in some time.2 Within the WisdomTree Chinese Yuan Strategy Fund (CYB), some of this impact was muted by the fund’s embedded income yield, derived from the fact that China’s short-term interest rates are higher than those in the United States. Looking forward, the largest potential uncertainty with regard to China in 2017 would be any direct shorter-term actions taken by President Trump’s new administration. In these early weeks, we can already see the Chinese government taking steps to stem currency depreciation.
• Europe: The WisdomTree Europe Quality Dividend Growth Fund (EUDG) had its largest single market exposure to the United Kingdom in 2016. On the one hand, investors did see the FTSE 100 Index reaching record highs, but a crucial element to those highs was that the headwind of a depreciating British pound was avoided. Since EUDG tracks the returns of an unhedged index, the greater than 16% depreciation of the British pound was a significant headwind for performance.3 The challenge for the WisdomTree Europe Local Recovery Fund (EZR) was the large exposure to the European Financials sector. In the first half of 2016, the negative interest rate world created a point of stress for European Financials. Then, in the second half, there were more idiosyncratic risks: 1) Deutsche Bank was widely focused upon due to settlement discussions with the U.S. Department of Justice, and then 2) Italian banks were widely focused on as a result of the Italian referendum. At some point, we believe that these large headwinds for European equity performance could dissipate, but the exact timing could be tricky.
Can the Momentum of 2016’s Top-Performing ETFs Continue?
• Commodity Currencies: The WisdomTree Brazilian Real Strategy Fund (BZF), WisdomTree’s top-performing ETF in 2016, exemplifies a broader trend for commodity currencies against the U.S. dollar. In 2015, this would have been among WisdomTree’s worst-performing strategies, since the Brazilian real lost approximately one-third of its value during that year.4 In 2016, the price per barrel of oil largely stabilized and commodities came back a bit. Single emerging market currency exposures may not be for all investors out there, but BZF as the top-performing fund at WisdomTree in 2016 provides a worthwhile example of what mean reversion looks like in a more general sense.
• U.S. Small-Cap Stocks: The WisdomTree SmallCap Earnings Fund (EES), the WisdomTree U.S. SmallCap Quality Dividend Growth Fund (DGRS), the WisdomTree SmallCap Dividend Fund (DES) and even the WisdomTree Global Hedged SmallCap Dividend Fund (HGSD) round out the rest of the five best-performing ETFs at WisdomTree in 2016, all for the same reason: exposure to U.S. small-cap stocks. The single largest catalyst for performance in this market segment was President-elect Donald Trump’s surprise victory. His quest to “make America great again” has led to immediate expectations of better economic growth, something to which small-cap stocks could be particularly sensitive. Also, plans to cut corporate tax rates—if enacted—could impact small-cap stocks to a greater degree than large caps, since large caps tend to have lower effective tax rates to begin with. After January’s inauguration, we will see how closely policy implementation matches up with market expectations.
1Sources: WisdomTree, Bloomberg, with data measured in terms of net asset value total returns over specified periods.
2Sources: WisdomTree, Bloomberg, with data measured from 12/31/15 to 12/31/16.
3Sources: WisdomTree, Bloomberg, with data measured from 12/31/15 to 12/31/16 for the depreciation of the British pound against the U.S. dollar.
4Sources: WisdomTree, Bloomberg, with data measured from 12/31/14 to 12/31/15 to capture the depreciation of the Brazilian real vs. the U.S. dollar in 2015.
Important Risks Related to this ArticleThere are risks associated with investing, including possible loss of principal. Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty; these risks may be greater in emerging and/or frontier markets. Funds focusing their investments on smaller companies, certain sectors or countries/regions increase their vulnerability to any single economic, regulatory or sector-specific development. This may result in greater share price volatility.
Investments in currency involve additional special risks, such as credit risk and interest rate fluctuations.
Investments in derivative investments can be volatile, may be less liquid than securities and may be more sensitive to the effect of varied economic conditions.
Some of the Funds use various strategies to attempt to minimize the impact of changes in applicable foreign currencies against the U.S. dollar, which may not be successful.
The Funds invest in the securities included in, or representative of, their Index regardless of their investment merit and the Funds do not attempt to outperform their Index or take defensive positions in declining markets.
As some of these Funds can have a high concentration in some issuers, the Funds can be adversely impacted by changes affecting those issuers. Due to the investment strategy of certain Funds, they may make higher capital gain distributions than other ETFs.
Please read each Fund’s prospectus for specific details regarding each Fund’s risk profile.
Christopher Gannatti began at WisdomTree as a Research Analyst in December 2010, working directly with Jeremy Schwartz, CFA®, Director of Research. In January of 2014, he was promoted to Associate Director of Research where he was responsible to lead different groups of analysts and strategists within the broader Research team at WisdomTree. In February of 2018, Christopher was promoted to Head of Research, Europe, where he will be based out of WisdomTree’s London office and will be responsible for the full WisdomTree research effort within the European market, as well as supporting the UCITs platform globally. Christopher came to WisdomTree from Lord Abbett, where he worked for four and a half years as a Regional Consultant. He received his MBA in Quantitative Finance, Accounting, and Economics from NYU’s Stern School of Business in 2010, and he received his bachelor’s degree from Colgate University in Economics in 2006. Christopher is a holder of the Chartered Financial Analyst designation.