Exchange-traded funds (ETFs) track benchmark indices. Although not all assets under management belong to the index, about 95% of them are selected directly from the index. ETFs are more like mutual funds, but the difference being that investors can easily buy ETFs off an exchange.
Often, ETFs present a strong case for investment because of low fees charged and a comfortable annual return. They become especially attractive when the stock market is in a bullish phase. Because they comprise of a mix of assets – equities, fixed assets, commodities, etc. – they offer a safe platform for investors to pack their funds. The diverse nature of a typical ETF’s portfolio makes it worthwhile because it reduces the magnitude of unsystematic risk to which investors are exposed.
ETFs’ performance so far
An ETF that tracks the S&P 500 comprises of equities drawn from the index. Usually, the ETF mixes the assets based on some weighting techniques to optimize the portfolio’s return. The better the return, the higher the demand by investors. Despite the efforts to optimize the portfolio, ETFs perform just within the neighborhood of the index. If the index soars, then the ETF is likely to soar. Whether the ETF bests the index depends on the mix of the portfolio.
Over the past few months, the US ETF market has seen some record performances in light of the bullish stock market. Many equity ETFs have bested their previous records as liquidity floods the market. But while equities were soaring, other sectors such as commodities – except for Gold and other precious metals – were underperforming. In the first three months of the COVID-19 pandemic, some of the worst-hit ETFs were those tracking the oil sector.
The week just ended, and the week started Monday 24 have seen some record-breaking performances in the equity market. On Monday 24, Nasdaq Composite touched 11,449.25 while the S&P 500 closed at 3,443.62 on Tuesday 25. For both of the indices, the values are all-time best. Potential proportional growth of the ETFs that track the indices contributed to a modest inflow of by the close of trading on Friday.
Commodity ETFs are soaring
When the pandemic set in, commodities (especially crude oil) ETFs fell out of favor. However, the sector is rebounding as countries edge closer to the full reopening of their economies. In the week ended Friday 21, for instance, United States Oil Fund LP was among the best rated. Investors are anticipating the energy sector, especially the oil industry, to fully rebound as economic activity reactivates across the globe.
As a result of the economic damage wrought by the pandemic, the Federal Reserve stepped into steady liquidity through massive cash injection. One of the direct consequences of this move is an increasing expectation of higher inflation by the market. For this reason, the bond market is gaining prominence as a lucrative destination for investors. Accordingly, some bond ETFs are presenting a strong case to investors. For instance, iShares iBoxx $ Investment Grade Corporate Bond ETF has been a significant contender for the top tier in the last few weeks. In short, the ETF market closely tracks the underlying asset.