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MOM

3 Hit and Flop Zones of Q3 and Their ETFs

For the broader stock market, Q3 has been the worst quarter with never-ending woes starting from Grexit concerns, China-led deceleration fears to the latest biotech meltdown. Global growth worries, slumping commodities, sluggishness in other developed and developing markets, and an uncertain Fed policy added to the chaos.

A slew of worries sent the major U.S. bourses into the correction territory in quick succession from its July peak with little signs of a revival any time soon. Notably, the S&P 500 index is on track to post its worst third-quarter performance in four years. The index is down 8.7% over the past three months.

Let's see how these situations have impacted the ETF world. While most corners of ETF investing performed terribly during this time period, a few areas have delivered handsome returns.

Best Zones

Volatility ETFs

Volatility products have been investors' darling during the third quarter as these tend to outperform when markets are falling or fear levels over the future are high, both of which happened lately. While all the ETFs in this space enjoyed smooth trading, C-Tracks on Citi Volatility Index ETN ( CVOL ) is the biggest winner, having surged nearly 41% in value (see: all the Volatility ETFs here ).

The note provides investors direct exposure to the implied volatility of large-cap U.S. stocks. The benchmark combines a daily rolling long exposure to the third- and fourth-month futures contracts on the CBOE Volatility Index with short exposure to the S&P 500 Total Return Index. The product has amassed $5.2 million in its asset base while charging 1.15% in annual fees from investors. The note trades in good volume of about 124,000 shares per day.

Long/Short ETFs

Amid the ongoing uncertainty and heighted volatility, investors seek alternative investments like long/short strategies to lower risk in their portfolio. This strategy takes the best of each bull and bear prediction by involving buying and short selling of equities at the same time. It involves taking long positions (buy) in stocks that are expected to increase in value while short positions (short sell) in stocks that are expected to decrease in value.

That being said, U.S. Market Neutral Momentum Fund ( MOM ) has gained nearly 16%. This fund looks to provide spread returns between high and low momentum price stocks within the Dow Jones U.S. Index. This is easily done by tracking the Dow Jones U.S. Thematic Market Neutral Momentum Index, which takes long position in the highest momentum stocks and short position in the lowest momentum stocks in equal weights and equal dollar amount within each sector (read: 6 Exceptional ETFs Up Over 15% YTD ).

This approach results in long and short positions in 400 stocks, divided equally. Due to this unique feature and some active management, the fund charges a higher annual fee of 1.49% from investors. However, MOM is often overlooked by investors as depicted by its AUM of $2.8 million and average daily volume of around 2,000 shares.

Long-Term Treasury ETFs

Financial instability and global growth fears continued to hold the Fed back from raising the first interest rates in more than a decade. This is benefitting the government bonds, especially the longer-term ones. Further, investors seeking flight to safety in a world torn by strife and uncertainties, is boosting the appeal for these securities and ETFs. In particular, Vanguard Extended Duration Treasury ETF ( EDV ) led the way, gaining 8.6% in the second quarter (read: Extended Duration ETFs Head to Head: EDV vs ZROZ ).

This fund provides exposure to the long-term Treasury STRIPS market by tracking the Barclays U.S. Treasury STRIPS 20-30 Year Equal Par Bond Index. The fund holds 73 bonds in total with effective maturity of 25.2 years and average duration of 24.8 years. Expense ratio came in at 0.12%. The product has amassed $363.1 million in its asset base while sees moderate volume of more than 62,000 shares per day on average.

Worst Zones

Energy ETFs

The resumption of the oil slide in the second quarter once again trapped the entire energy sector in brutal trading. This is especially true in the current backdrop of growing global glut, higher production and the China slowdown that is making the demand and supply dynamics worse by the day. While most of the ETFs in the space have seen rough trading, First Trust ISE-Revere Natural Gas Index Fund ( FCG ) stole the show, plunging over 41% (read: Inside the Crash in the Natural Gas Equity ETFs ).

The fund offers exposure to the U.S. stocks that derive a substantial portion of their revenues from the exploration and production of natural gas. It follows the ISE-REVERE Natural Gas Index and holds 31 stocks in its basket, which are well spread out across components with none holding more than 4.48% share. The fund has amassed $157 million in its asset base while charging 60 bps in annual fees. Volume is good with around 1.1 million shares exchanged per day on average.

Mining ETFs

The global commodity rout has been hammering the mining sector badly for long as the companies in this sector were sliced by budget cuts, reduced spending and withheld projects. In particular, copper has been the hardest hit by twin attacks of a commodity slump and the China-led global market sell-off. As a result, Global X Copper Miners ETF ( COPX ) shed 40% in its value in the second quarter.

The ETF targets the global copper mining industry and follows the Solactive Global Copper Miners Index. It is highly concentrated on the top 10 firms with a double-digit allocation to Sandfire Resources. In terms of a national breakdown, Canada takes the top spot with 25% of assets while Australia and Mexico round out the next two spots with a double-digit exposure each. The product has managed $16.7 million in AUM while charges 65 bps in fees per year. It trades in light volume of 47,000 shares a day on average (read: No Gains on Chile for Copper ETFs; Global Ills Spoil Sport ).

Solar ETFs

The solar industry is entangled in vicious oil trading given investors' misconception that oil price and solar market fundamentals are directly related with each other. Given this, Guggenheim Solar ETF ( TAN ) , which offers exposure to the global solar industry, tumbled about 35.4% in the second quarter (read: TAN vs. YLCO: Which is the Better Solar ETF? ).

The product follows the MAC Global Solar Energy Index and holds 26 securities in its basket with the largest allocation going to the top three firms that combined to make up for 22.6% share. American firms dominate the fund's portfolio at nearly 42%, followed by China (38.3%) and Canada (4.2%). The product has amassed $238.6 million in its asset base and trades in solid volume of around 250,000 shares a day. It charges investors 70 bps in fees per year.

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C-TRAC VOLAT IX (CVOL): ETF Research Reports

QS-US MN MOMNTM (MOM): ETF Research Reports

VANGD-EX DUR TR (EDV): ETF Research Reports

FT-ISE R NAT GA (FCG): ETF Research Reports

GLBL-X COPPER (COPX): ETF Research Reports

GUGG-SOLAR (TAN): ETF Research Reports

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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