WisdomTree

Commodities, Dividends, Emerging Market Currency, Emerging Markets

Our 10 Top-Performing ETFs—First Half of 2016

by Christopher Gannatti, Associate Director of Research on July 19, 2016

Having 99 distinct exchange-traded funds (ETFs) spanning many global markets and asset classes allows us to examine the top 10 performers in a particular period to determine what stories worked best.

We believe the most important catalyst for what transpired over the course of the first half of 2016 was this:

The market transitioned from expectations of four incremental increases in the Fed Funds target interest rate1 to expectations of potentially zero increases for the whole of 2016.2
 
Emerging Market Currencies Appreciated against the U.S. dollar: The trend of dollar strength, especially against emerging market currencies over the past few years, dominated the unhedged emerging market investment experience. In the first half of 2016, this trend reversed. The WisdomTree Brazilian Real Strategy Fund (BZF) was the most extreme individual expression, providing a return commensurate with the spot currency return of the Brazilian real against the U.S. dollar, along with the incremental difference in money market returns in Brazil versus the U.S. dollar. After depreciating by nearly one-third in 2015, the real came back as people thought Brazil’s political situation might be poised for change, along with the Federal Reserve’s slower-than-expected hiking of the Federal Funds Rate, which helped stave off the drops in commodity prices that we saw during 2015.

o The WisdomTree Emerging Markets Local Debt Fund (ELD) and the WisdomTree Emerging Markets High Dividend Fund (DEM) were also helped, as both were running into the wind over the past few years due to emerging market currencies depreciating significantly. Now both of these Funds have benefited from emerging market currencies appreciating against the U.S. dollar and have significant upside potential on valuation, given that they’ve been among WisdomTree’s worst performing ETFs over the past few years.

 
Commodities Generally Rose in Price: Both the WisdomTree Global Natural Resources Fund (GNAT) and the WisdomTree Commodity Country Equity Fund (CCXE) track Indexes that are designed to appreciate from positive trends or sentiment within commodities markets. As the price of oil and other commodities plummeted on the dollar strength, these strategies did not perform well. However, now that the price of a barrel of oil moved from below $30 in February of 2016 to around $50 in June, the picture has changed.3 CCXE in particular is designed to respond both to currency appreciation (including the Brazilian real, Chilean peso, Russian ruble, South African rand, Norwegian krone, New Zealand dollar, Canadian dollar and Australian dollar) against the U.S. dollar and to any positive sentiment that helps equity performance in these markets.

o WisdomTree Coal Fund (TONS) Up More than 30%: The single best-performing ETF for 1H2016 was TONS, which is designed to track the daily price movements of Rotterdam coal futures traded on the CME Group, Inc., exchanges. This was surprising, to say the least, and we believe that the primary factor in play for this period was that coal—like many other commodities—was participating in the energy rally we have seen.

 
Higher-Yielding Dividend Payers Outperformed as Interest Rates Plummeted: 2016 began with a U.S. 10- Year Treasury note at close to 2.3%. As of June 30, 2016, this figure was closer to 1.4%—a major decline.4 These lower rates, in our view, represent a general risk aversion—spurred most recently by the Brexit market surprise—but they also represent market expectations of slower economic growth looking forward. If fixed income rates are trending toward significant decreases such as this, it makes dividend-paying equities more attractive, as people’s income goals typically do not change with movements in interest rates. The WisdomTree High Dividend Fund (DHS) has been the strongest solution for this need, but the WisdomTree MidCap Dividend Fund (DON) and the WisdomTree SmallCap Dividend Fund (DES) also fit the bill. These strategies include exposure to real estate investment trusts (REITs)—another example of an asset class that has tended to have strong potential in a falling or low-interest rate environment. The WisdomTree Dividend ex-Financials Fund (DTN) is interesting for its avoidance of Financials—the trickiest global sector in the first half of 2016—and defensive positioning, which can help, given all the uncertainties investors are preparing for in 2016. View the standardized performance of WisdomTree ETFs here.

WisdomTree’s 10 Best-Performing ETFs for 1H2016
WT 10 Best Performing

Important Risks Related to this Article

There 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 or offshore markets.

Funds focusing their investments on a single country, sector and/or smaller companies may be vulnerable to any single economic or regulatory development. This may result in greater share price volatility. 

Fixed income investments are subject to interest rate risk; their value will normally decline as interest rates rise. In addition, when interest rates fall, income may decline. Fixed income investments are also subject to credit risk, the risk that the issuer of a bond will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline.

An investment in TONS is speculative, involves a substantial degree of risk and should not constitute an investor’s entire portfolio. One of the risks associated with the Fund is the complexity of the different factors that contribute to the Fund’s performance. These factors include use of commodity futures contracts. Derivative investments can be volatile, and these investments may be less liquid than other securities, and more sensitive to the effects of varied economic conditions. The value of the shares of the Fund relates directly to the value of the futures contracts and other assets held by the Fund, and any fluctuation in the value of these assets could adversely affect an investment in the Fund’s shares. Investments in commodities may be affected by overall market movements, changes in interest rates and other factors, such as weather, disease, embargoes and international economic and political developments. Commodities and futures are generally volatile and are not suitable for all investors. The Fund is not an Investment Company within the meaning of the Investment Company Act of 1940, as amended, and is not subject to the regulations thereunder.

Investments in currency involve additional special risks, such as credit risk and interest rate fluctuations. Derivative investments can be volatile, and these investments may be less liquid than other securities, and more sensitive to the effects of varied economic conditions. As some Fund can have a high concentration in some issuers, the Funds can be adversely impacted by changes affecting those issuers. Unlike typical exchange-traded Funds, there are no indexes that BZF attempts to track or replicate. Thus, the ability of the Fund to achieve its objectives will depend on the effectiveness of the portfolio manager. 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.

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