By Christian Magoon
CEO, Magoon Capital
The shadow cast over world markets by the EU debt crisis this year has been immense. Investors have witnessed a variety of investments - from stocks to gold - lose considerable value. Inverse or short ETFs have certainly benefited as markets have reversed earlier gains, but there are a variety of traditional ETFs that have succeeded throughout 2012. Achieving what I call the "Triple Crown" - positive year to date, three month and one month performance - these ETFs are delivering in the midst of tough market conditions and are worth a closer look.
Believe it or not, there are a variety of traditional ETFs that have achieved positive returns over all three time periods - year to date, three month and one month - in 2012. By ranking this group by one month performance, I decided to focus on the 10 ETFs that have weathered the most intense period of the EU crisis the best. These 10 Triple Crown ETFs gained between 3.6% - 6.6% over the last month under tough market conditions. In contrast ETFs tracking the S&P 500, gold prices and emerging markets have declined between 3% - 11% over the last month.
The list of the top 10 Triple Crown ETFs is certainly diverse yet most of these ETFs share a common thread. Indeed eight of the 10 ETFs are coming off negative returns in 2011. These declines ranged from 4% - 37%. However, since the beginning of 2012 all have been on a constant path of improvement as evidenced by solid performance across the three time periods. Here's the Triple Crown ETF chart, sorted by one month performance.
Several themes emerge from the Triple Crown ETF list. First, it is hard not to notice the China ETFs on the list. Four of the 10 Triple Crown ETFs (TAO, CHXX, FCHI, and CHII) are China ETFs and three of the four are sector focused. All three China sector ETFs lost over 20% in 2011 but have managed to recover nicely in 2012 despite continued economic uncertainty in China.
Another theme is the presence of four U.S.-oriented ETFs (ITB, FBT, MOM, IFNA) Three of the four are focused on sectors within the U.S. and two specifically on housing. The single broad based ETF in this group, MOM, takes a unique approach to the U.S. market by going long and short stocks based off momentum. This ETF, which launched in September of 2011, has produced the smooth returns that are expected from a broad based core holding.
Finally the ETFs that did not fit neatly into a China or U.S. sleeve were GXG and THD. These ETFs represent broad based exposure to the emerging nations of Colombia and Thailand respectively. Both ETFs experienced negative returns in 2011 and are recovering in 2012 despite the turmoil in Europe.
The Triple Crown ETF list illustrates a variety of concepts to ETF investors. First the list demonstrates the depth of products available in the ETF toolbox. This depth, despite widespread market declines, has created opportunities for investors to succeed in ETFs. Unfortunately, many of these ETFs have been "under the radar" for most investors until now. Second, most of the Triple Crown ETFs have benefited from being "oversold" in 2011, which is a wink to contrarian investors. In fact areas like housing and China are still likely to cause negative emotions from investors today, despite their bounce in 2012. This is an example of how removing emotions through investment discipline can yield opportunities that others just can't see. Finally while most investors don't have specific allocations to areas like U.S. housing or Chinese sectors, the Triple Crown ETFs point to the opportunity for tactical positions in a portfolio. These positions can often serve as an effective hedge to core holdings or even a potential alpha generator.
Despite the crisis du jour, ETF investors will continue to witness markets and strategies that produce attractive results. While the current Triple Crown ETF list will change, the value found in the concepts of ETF choice, investment discipline and tactical investing will endure.