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Potential opportunities
in ETF losers

Martin Small |Oct 5, 2016

Stretched valuations have made stock bargains harder to find, but there are still plenty of unloved investments that could offer opportunities. Here’s how to spot potential “ETF dogs.”

One of the frustrations I'm hearing more and more from investors is that “nothing's cheap.” And it's certainly true that stretched valuations and crowded trades have made bargains harder to find.

That said, for those seeking contrarian or value-oriented ideas, there are still plenty of unloved investments that could offer tactical opportunities—provided investors are willing to tolerate at least some period of discomfort.

Bring on the dogs

An interesting way to potentially identify and tap into these opportunities is to borrow from the popular “Dogs of the Dow” strategy, which invests in the 10 highest-yielding stocks in the Dow Jones Industrial Index—and execute using exchanged traded funds (ETFs).

The “Dogs of ETFs” approaches the concept a little differently.

  • First , it screens investments through the lens of market price, thus identifying the “true” losers.
  • Second, because ETFs hold bundles of securities, you can still keep your focus narrow—there's an ETF for almost any market segment you can think of—while helping to diversify your risk.
  • Finally, rather than automatically rebalancing once or twice a year, it's important to recognize that an ETF “story” may unfold over a different horizon—potentially demanding patience and fortitude.

In other words, if you're a value investor, don't just ask yourself, “How much is that dog?” Think about how long it may take to get him trained.

Reading the losers

So what can we glean from the current pack of ETF dogs? Let's look at the 25 worst-performing iShares stock funds year to date (as of 9/23/2016), a timeframe in which the S&P 500 gained 5.18%.

Bottom 25 ETFs

TickerNameYTDExpense ratio %
HEWI iShares Currency Hedged MSCI Italy ETF -19.86% 0.48*
EWI iShares MSCI Italy Capped ETF -18.22% 0.48
HEWJ iShares Currency Hedged MSCI Japan ETF -13.79% 0.48*
EUFN iShares MSCI Europe Financials ETF -12.96% 0.48
IBB iShares Nasdaq Biotechnology ETF -12.89% 0.47
KSA iShares MSCI Saudi Arabia Capped ETF -9.98% 0.74
EIRL iShares MSCI Ireland Capped ETF -7.99% 0.48
EWUS iShares MSCI United Kingdom Small-Cap ETF -7.94% 0.59
HEWP iShares Currency Hedged MSCI Spain ETF -5.88% 0.52*
ICLN iShares Global Clean Energy ETF -4.43% 0.47
IHE iShares U.S. Pharmaceuticals ETF -4.36% 0.44
EWW iShares MSCI Mexico Capped ETF -3.91% 0.48
EWP iShares MSCI Spain Capped ETF -3.56% 0.48
HEZU iShares Currency Hedged MSCI Eurozone ETF -2.23% 0.52*
IXG iShares Global Financials ETF -2.15% 0.47
IYG iShares U.S. Financial Services ETF -2.04% 0.44
HEFA iShares Currency Hedged MSCI EAFE ETF -1.36% 0.35*
IHF iShares U.S. Healthcare Providers ETF -0.87% 0.44
EWU iShares MSCI United Kingdom ETF -0.80% 0.48
IVLU iShares Edge MSCI Intl Value Factor ETF -0.75% 0.30
HEWG iShares Currency Hedged MSCI Germany ETF -0.56% 0.53*
IEUR iShares Core MSCI Europe ETF -0.41% 0.12
IXJ iShares Global Healthcare ETF -0.31% 0.47
IEV iShares Europe ETF -0.18% 0.60
EIS iShares MSCI Israel Capped ETF 0.15% 0.62

Past performance does not guarantee future results. For standardized performance, click here.

Returns as of 9/23/2016; expense ratios as of 9/1/2016. List excludes funds launched 2016.
*Net expense ratios. Gross expense ratios are as follows: HEWI: 1.11; HEWJ: 1.01; HEWP: 1.11; HEZU:1.11; HEFA: 0.70; HEWG: 1.01. Fee waivers are contractual through: HEWI, HEWJ, HEWP, HEZU, HEWG: 12/31/2020; HEFA: 11/30/2020.

Within this list, we can see two broad areas that have come under pressure.

The first is non-U.S. developed markets

Market prices for many broad and single-country funds were hit this year by fresh doses of economic and political challenges. Think the UK and Brexit, Japan and the impact of the strengthening yen, Italy and its bank loan troubles. European banks sank overall, with iShares MSCI Europe Financials ETF (EUFN) declining approximately 13% year to date.

These stories are still playing out of course, with a turnaround driven by when and how well monetary policy takes hold in both regions.

Pharmaceuticals and healthcare

The second is pharmaceuticals and healthcare, a market segment that has seen seven straight years of double-digit gains. We don't think the current price dips—iShares Nasdaq Biotechnology ETF (IBB) slipped 13% year to date—signal an inflection point for the underlying companies. In our view, the sector appears to be taking a “breather” during the uncertainties of the U.S. election season.

While the catalysts for both of these areas are fairly clear, however, what's harder to discern is whether any of these markets are screaming buys.

A lesson from the winners

In deciding when and how to invest, we can also gain insights from the other end of the performance spectrum—the “eagles” instead of the dogs.

Looking at the top performing 25 iShares ETFs, then, we can once again pick out two dominant themes: precious metals and emerging markets. The numbers this year were extremely strong, particularly given the volatility in the broader markets. Gold and silver mining ETFs each posted triple-digit price increases, while single country and regional EM funds rose 20% and more.

Top 25 ETFs

TickerNameYTDExpense ratio %
SLVP iShares MSCI Global Silver Miners ETF 159.20% 0.39
RING iShares MSCI Global Gold Miners ETF 106.69% 0.39
EWZS iShares MSCI Brazil Small-Cap ETF 70.97% 0.62
EPU iShares MSCI All Peru Capped ETF 66.62% 0.62
EWZ iShares MSCI Brazil Capped ETF 63.01% 0.62
SLV iShares Silver Trust 41.21% -
PICK iShares MSCI Global Metals & Mining Producers ETF 35.77% 0.39
ILF iShares Latin America 40 ETF 31.61% 0.49
ERUS iShares MSCI Russia Capped ETF 30.44% 0.62
THD iShares MSCI Thailand Capped ETF 27.07% 0.62
EIDO iShares MSCI Indonesia ETF 26.46% 0.62
IAU iShares Gold Trust 26.34% -
DVYE iShares Emerging Markets Dividend ETF 24.37% 0.49
ICOL iShares MSCI Colombia Capped ETF 24.02% 0.61
ENZL iShares MSCI New Zealand Capped ETF 24.00% 0.48
EZA iShares MSCI South Africa ETF 23.55% 0.62
DVYA iShares Asia/Pacific Dividend ETF 21.97% 0.49
SOXX iShares PHLX Semiconductor ETF 21.47% 0.48
EWT iShares MSCI Taiwan ETF 21.38% 0.62
REM iShares Mortgage Real Estate Capped ETF 20.26% 0.48
IDU iShares U.S. Utilities ETF 19.94% 0.44
IGE iShares North American Natural Resources ETF 19.77% 0.48
ECH iShares MSCI Chile Capped ETF 18.59% 0.62
EWC iShares MSCI Canada ETF 18.56% 0.48
MXI iShares Global Materials ETF 18.22% 0.47

Past performance does not guarantee future results. For standardized performance, click here.

Returns as of 9/23/2016; expense ratios as of 9/1/2016. List excludes funds launched 2016.

What the numbers don't show are the often long periods of declines that set the stage for an upswing. For example, the 63% gain in the iShares MSCI Brazil Capped ETF (EWZ) came on the back of nearly seven years of price declines. Unless your entry point was at the low in late January, you almost certainly had to endure a stretch of unpalatable results.

And for value investors, the ability to hang in there when others are still headed in the opposite direction may be the hardest skill to learn of all.

Martin Small
Managing Director
Martin Small, Managing Director, is Head of U.S. iShares at BlackRock. He is responsible for directing strategy and leading U.S. regional activities across multiple ...
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