The 7 Best-Performing ETFs This Year

04/05/2011 8:00 am EST

Focus: ETFS

Michael Johnston

Co-Founder and Senior Analyst, ETF Database

Funds tracking industry groups like energy and commodities rule, but alongside a few widely followed funds are some surprises as we review the seven biggest gainers of 2011’s first quarter.

The first quarter of 2011 is officially in the books, and the last three months have been a stretch marked by instability both domestically and abroad. Significant uncertainty remains, as investors are still divided on the outlook for interest rates, further stimulus measures, and the ability of emerging markets to continue driving global GDP growth.

Despite the lingering concerns, however, the first quarter was a generally strong stretch for most portfolios. The broad-based S&P 500 ETF (SPY) added a little more than 5% during the last three months, while the most popular emerging markets ETF, the Vanguard Emerging Markets VIPERs (VWO) added close to 2%.

Several ETFs have turned in blistering performances to start the year, surging by more than 20% in the first quarter of 2011. Among the best performers are a number of funds traders might expect, as well as several that likely wouldn’t come to mind immediately.

It’s interesting to note that the seven ETFs profiled below have aggregate assets of only about $2 billion—and $1.5 billion of that is in just one of the funds, XOP, which tracks the oil and gas exploration sector. It turns out that bigger isn’t always better.

Below, we profile the seven best ETF performers during the first quarter of the year, ranking in order of lowest return to highest:

SPDR S&P Oil & Gas Exploration & Production ETF (XOP): Up 22.7%

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A number of ETFs on this list were aided by a surge in oil prices in the first quarter, as uncertainty in the Middle East sent energy commodities sharply higher. This ETF is linked to an equal-weighted index made up of firms engaged in the exploration and production of oil and natural gas supplies.

With prices surging, the demand for the services of such companies has climbed sharply higher as well, putting XOP on pace to more than double in price this year.

Market Vectors Solar Energy ETF (KWT): Up 23.1%

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Solar energy was one of the worst-performing sectors of 2010, as the entire alternative energy space missed out on a year-long rally in equity markets. Last year’s drop was primarily related to the challenging economic environment; cash-strapped governments across Europe were forced to cut or eliminate subsidies for alternative energy, dealing a blow to the young industry.

Solar energy’s rise this year has come not from a reversal of this trend, but as a result of the fallout from the Japanese earthquake. Anxiety over expanding the use of nuclear power, combined with skyrocketing oil prices (see above, and below) has pushed other sources of energy into the spotlight and brightened the outlook for solar power

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United States Brent Oil Fund (BNO): Up 24.6%

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Brent oil has been on a tear in 2011, as the wave of protests across the Middle East has placed strong upward pressure on oil prices. The spike in geopolitical tensions overseas, combined with soft demand in the US, has created a disconnect between various oil contracts and threatened the dominance of West Texas Intermediate (WTI) as the default benchmark.

The United States Oil Fund (USO), which offers exposure to WTI contracts traded on the futures exchange in New York, has also rallied in 2011, but it trails far behind BNO. USO is up just over 9% year to date.

PowerShares S&P SmallCap Energy Portfolio (PSCE): Up 25.0%

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Continuing the dominance of energy-related products on our list, this PowerShares small-cap fund has gained 25% through just three months of the year. PSCE can be thought of as the small-cap counterpart to the popular Select Sector SPDR - Energy (XLE), as this fund offers exposure to small-cap companies in the energy sector. Whereas the sector SPDRs carve up the universe of large-cap companies, the suite of small-cap ETFs from PowerShares divides up the S&P SmallCap 600 Index.

The distinction between small and large caps has been a big one in the first quarter, at least as far as the energy space is concerned. All of the products in the Energy Equities ETFdb category enjoyed a strong start to the year, but all of those focusing on large-cap securities have lagged behind PSCE.

The ultra-popular XLE is up just 16.9%, a gap of more than 800 basis points to this small-cap counterpart.

ELEMENTS CS Global Warming ETN (GWO): Up 30.8%

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If you’ve never heard of GWO, you’re not alone; this exchange traded note (ETN) has under $5 million in assets. GWO is linked to the Credit Suisse Global Warming Index, a benchmark consisting of companies that have a focus on products or services related to minimizing global warming.

Themes represented in the benchmark include demand management, emissions limitation, renewable energy, and renewable fuels.

GWO is structured as an ETN, meaning that it is a debt instrument linked to the performance of the aforementioned index.

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B2B Internet HOLDRS Trust (BHH): Up 41.9%

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This product isn’t actually an ETF, and the current composition of the fund makes it one of the least useful exchange traded products out there. BHH consists of just two companies; Ariba Inc. (ARBA) accounts for about 92% of assets while Internet Capital Group makes up the remainder. This hyperconcentration is a result of the manner in which HOLDRS products are constructed and maintained; there is no underlying index and no rebalancing.

Ariba stock has surged this year, and BHH is little more than a vehicle offering exposure to that company (with a meaningful expense ratio built in). If you’ve been lucky enough to own this product—it has only about $11 million in assets—it might be time to sell and find a more efficient use of the capital.

iPath Dow Jones-UBS Cotton ETN (BAL): Up 42.7%

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This exchange traded note has been by far the best performer year to date, surging thanks to continued worries that demand will outpace supply. Cotton prices have hit all-time highs several times this year, as strong demand from China, India, and other emerging markets have sent this soft commodity sharply higher. Heavy rains in Australia and Pakistan—two major cotton producers—have also contributed to the sharp run up in cotton prices.

By Michael Johnston of ETFdb.com

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