For the U.S. economy, 2014 has been a banner year but the exact reverse has been true for most of the developed foreign economies. The Euro zone and Japan had a particularly rough ride. Apart from these economies, the year did not favor some other investing segments either. Within the bunch, commodities across the board fell in 2014 thanks to the rising greenback and adverse demand-supply imbalances.
Poor global growth, stemming mainly from the prolonged slowdown in the world’s second and third largest economies – China and Japan – as well as renewed recessionary threats in the debt-laden Euro zone played its role in suppressing the overall demand profile. If these were not enough, 2014 marked the return of an oil collapse long after 2009. Notably, crude shed about 45% this year.
Needless to mention, most ETFs pertaining to the beaten-down sectors traded in the red or gave a flat performance. However, with the global events taking a turn and the excessive sell-off in some sectors causing the same to reach a bottom, ETFs losers of 2014 might see a rebound in 2015.
Let’s take a look at some of ETF laggards of 2014 which some hope could turn out to be leaders to start 2015:
Energy
The oil price slump has been in the spotlight throughout the second half of 2014. No production cut from OPEC amid supply glut, price war among producers and lackluster demand pushed oil to free fall mode in 2014. This led to a bearish trading spell not only in oil ETFs, but also natural gas, alternative energy and the country ETFs related to oil production and export.
However, with major energy products being on the verge of an oversold territory and the winter setting in, energy ETFs might jump off their lows to enter 2015. If the Northern Hemisphere gets another cold snap in 2015 like this year, energy ETFs will likely return to form.
Energy ETFs have already started to get in shape as evident from their most recent performances. Over the last one week (as of December 23, 2014), S&P SmallCap Energy Portfolio (NASDAQ:PSCE), SPDR S&P Oil & Gas Exploration & Production (NYSE:XOP), Canadian Energy Income ETF (NYSE:ENY) and DWA Energy Momentum (NYSE:PXI) have added in the range of 11% to 15%.
Keeping in mind the cold snap, investors should have a close watch on the equity version of the natural gas ETF ISE-Revere Natural Gas Index Fund (NYSE:FCG). However, it would be wise not to crowd around oil and gas futures ETFs as the dollar strength will likely keep commodities under pressure next year too. However, investors with a strong stomach for risks should jump to this segment.
Europe
The year 2014 has put the Euro zone in dire straits. Region-wide deflationary worries, Portugal banking crisis and the latest political strife in Greece have rung new alarms. To plug the issue, the ECB has resorted to more rate cuts, introduction of negative deposit rate and consideration of a QE measure, should the scenario worsen. Meanwhile, corporate earnings of the continent were more-or-less satisfactory indicating that Europe ETFs could be great picks next year.
First of all, FTSE Norway 30 ETF (NYSE:NORW) – down 21.7% YTD but up 8.5% (last week) – should benefit the most from a likely oil rebound and QE talks in Europe. Another Norway ETF – MSCI Norway Capped Investable Market Index Fund (NYSE:ENOR) – is down 20% this year but was up 9.2% (last week).
Other ETFs that lagged this year but could surge to start 2015 are the likes of WisdomTree United Kingdom Hedged Equity Fund (NASDAQ:DXPS), Stoxx European Select Dividend Index Fund (NYSE:FDD), Europe AlphaDEX Fund (NYSE:FEP), iShares MSCI France ETF (ARCA:EWQ) and Currency Hedged MSCI Germany ETF (HEWG). In fact, HEWG has a Zacks ETF Rank #2 (Buy). Over the week prior to Christmas, these ETFs advanced about 6.2%, 5.2%, 4.8%, 5% and 5.8%, respectively.
Precious Metal
Among the broad-based bearishness of precious metals all through 2014, palladium was the only metal that stood out thanks to the supply crunch on geopolitical tensions between Ukraine and Russia since the start of the year and a five-month long mine strike (which ended in June) in South Africa – the second biggest palladium producer.
On the other hand, another precious as well as industrial metal, silver –which was down about 20% in 2014 on the fading lure of safe-haven and inflation-hedged status – should recoil in 2015 after declining for three years. Additionally, a report by the U.S. Mint indicated increasing hunger of small-time retail investors for American Eagle silver bullion coins.
As a result, all silver ETFs could be due for a turnaround next year. E-TRACS UBS Bloomberg CMCI Silver ETN (NYSE:USV), having lost about 21% so far this year, has added about 1.9% in the last five trading sessions (as of December 23, 2014).
Another ETF, Physical White Metal Basket Shares (NYSE:WITE) allocating about half of its portfolio to silver, followed by platinum (35.4%) and palladium (15.6%), might catch your eye in the New Year. WITE – a Zacks ETF Rank #2 ETF – was up 0.5% in last week after losing 12.7% this year.
Junk Bond
As soon as the Fed announced that it will take a ‘patient’ stance on the rate hike issue, junk bond ETFs headed for a northward outing. However, the space has a lot to do with energy companies leaving a great deal of their fate resting on the proper energy recovery due for next year. Otherwise, the interest rate backdrop should favor at least till Q1 of 2015.
A tilt toward global funds might be a prudent idea this time. Global High Yield Corporate Bond Fund (NYSE:GHYG) – a Zacks ETF Rank #3 ETF – has lost about 3.4% in 2014 but added 2.1% in the past week. GHYG has about 60% U.S. coverage while Luxembourg (6.9%) and the U.K. (5.7%) round out the next two spots.
Another high yield international ETF – Market Vectors International High Yield Bond ETF (NYSE:IHY) – was up 3% last week while it has retreated about 4.1% this year. The latest performance from the U.S. pack is not also that awful as apparent from Peritus High Yield ETF’s (NYSE:HYLD) one-week return of 5.5% following a year-to-date loss of 13.2%.