time now for our etf report for etf
trends
exchange traded funds or etfs have been
around for the best part of three
decades but they've been attracting
greater investment in recent years
these days there seems to be an etf for
just about anything a blockchain themed
etf innovation etf thematic etfs is an
etf
but what actually is an etf it sounds
daunting here's what you need to know
about this marker it's been brutal for
ark you are in the toughest battle of
your career
etfs are baskets of stocks commodities
or other assets the pool and investors
money and track a benchmark to measure
their performance
[Music]
this is david jones he's our resident
chief market strategist here at
capital.com
etfs or exchange traded funds they're
like mutual funds except they're traded
in the stock market like any regular
individual stock
all etfs with stocks in their portfolio
will begin by following a stock market
index
here at capital.com we've examined data
on the top 100 most popular etfs to
assess how changing market conditions
may affect them
but here's the thing
there isn't just one type of etf this
asset class comes in a few shapes and
sizes
and just so you know we didn't include
leverage etfs in our research because
they tend to magnify returns
there's quite a few different kinds of
etf there's index based
sector-based synthetic etfs and then
each of these etfs can be divided once
more into passive or actively managed
etfs
here's a breakdown of the main ones
this is the quintessential passive etf
it invests in all stocks in a stock
market index like the s p 500
its value derives from enabling
investors to directly relate the
performance of the etf to the u.s stock
market as a whole
the primary advantage of investing in an
index based etf is low cost
basically etfs have lower operating
expenses than actively managed mutual
funds
actively managed etfs start off like an
index based etf by choosing an index
like the s p 500 and this is where an
experienced fund manager comes in
then they begin deviating away from that
index to try and achieve a higher return
than the index itself
they're not too dissimilar to
traditional actively managed funds
sector-based etfs invest in a sector
portfolio like energy healthcare or
technology
an advantage here is that investors can
simply buy the etf
knowing that the selection of stocks is
from their sector of choice
a disadvantage here is that if the
entire sector does poorly then the etf
is going to follow suit
we'll come back to sector etfs in a bit
there's also synthetic etfs
instead of investing in stocks this type
of portfolio invests in derivatives and
swaps
derivatives are complex financial
contracts between two parties which
derive their value from an underlying
asset this can be a commodity a stock
foreign exchange rate or a market index
swaps are slightly different
swaps are a type of derivative product
in which two parties agree to exchange
future cash flows from two different
underlying assets
okay so now you've understood the
different types of etfs what are the
current trends in this market
the etf market has been growing for the
past two decades but it's really taken
off since 2012.
from our list the 100 most popular etfs
based on total trading volume over the
past 12 months
the vast majority are in equities
a fifth are focused on bonds
commodity-based etfs make up a smaller
number still
and these were the five top performing
etfs in the first four months of 2022
all were sector-based etfs of which four
were energy sector funds
demand for goods soared after lockdowns
eased and then of course the war in
ukraine they've all contributed to
soaring energy and commodity prices
so naturally these factors have
benefited energy sector etfs that said
there's no guarantee that the same trend
will continue in the future
[Music]
investing in sector-based etfs doesn't
mean you'll outfox the stock market
let's take the s p 500 an index made up
of the 500 largest publicly listed
companies in the us
it gained 220 over the past decade
whereas the energy sector has only
delivered a 70 return
the main reason for the overperformance
of the broad u.s stock market versus the
energy sector is related to the rally in
technology stocks over the past decade
the technology sector has delivered a
450 percent return
thanks to the to the extraordinary
rising companies such as apple amazon
and netflix
from the same list of the 100 most
popular etfs these five offer the lowest
returns
two are chinese etfs and one broad-based
russian etf offered weak returns
the war in ukraine which has encouraged
divestment from russian-owned assets and
china's zero covert policy which has
slowed the country's pandemic recovery
has put pressure on chinese and russian
stocks
one etf that didn't deliver on its hype
in 2021 was the arc innovation etf
launched by entrepreneur kathy wood
it's a broad-based collection of tech
stocks
kathy wood the best money manager of
2020 and one of the worst of 20. we have
been in a terrible bear market for
innovation
the ark innovation etf has been i think
an incredible story in both directions
over the last couple of years boomed
higher on the recovery in 2020 exposure
to tech stocks like tesla magnified its
returns
but actually it's massively
underperformed as investors became wary
about valuations of some of these growth
stocks
over the past 12 months those who
invested in the arc innovation etf lost
more than 60 percent of their original
investment
it's an actively managed etf an
emblematic of the new economy as it
mostly comprises up-and-coming tech
stocks
whether these new economy stocks bounce
back soon remains to be seen
so how could traders approach this
market
invest and leave it
or hire a fund manager
a passive etf tracks the performance of
its index
mirroring their returns or losses
an smp 500 tracker
is a good example of one
since 1957 the s p 500 has made
long-term annual returns of 10.5
the spyder etf has tracked this same
index since the early 90s
providing the same returns
but over the past 12 months the s p 500
did worse than the three most popular
actively managed funds
in recent years the technology sector
has accounted for a sizable proportion
of the u.s stock market's value but
they've under-performed in the past 12
months
so this has caused passive etfs that
track the stock market to underperform
with the stock market despite this
passive etfs dominate the etf market in
terms of daily trading volume
in fact the top three etfs by trading
volume track the s p 500 and the nasdaq
so our actively managed etfs all they're
cracked up to be
[Music]
a recent study published by s p research
found that in 2021 almost 80 percent of
actively managed equity funds in the us
underperformed the broad u.s stock
market
[Music]
over a 10-year period
their proportion jumps to 86
and in 20 years it reaches 90 percent
there is a tiny percentage of funds
outperforming the smp active investing
is struggling to beat the market
one of the most famous examples of
investors beating the stock market is of
course warren buffett i'm having the
time of my life
shares in the moguls conglomerate
berkshire hathaway delivered annual
returns of 20
between 1965 and 2021
which is more than double what the smp
delivered in terms of annualized return
in the same time period
there is another approach though
i ask for cream and you give me milk and
water
sector-based etfs are like a middle
ground between active and passive etfs
in terms of how the portfolio is put
together so they offer all of the risks
and potential rewards of that selected
sector
energy sector etfs have outperformed the
stock market by more than 50
over the past year
[Applause]
the key reason behind this massive
outperformance of the energy sector
relative to the broad u.s stock market
is related to the mind-blowing rise in
oil and gas prices
energy prices were already soaring
following two years of supply disruption
during the pandemic
russia's invasion of ukraine and the
fallout over sanctions against moscow
have caused the price of these vital
commodities to surge even higher
natural gas prices in the u.s increased
more than 170 percent in the last 12
months and european natural gas prices
increased more than 300 percent in the
last year
of course not all sector-based etfs have
performed well over the past year
these were the five worst performing
sectors etfs like other markets can
endure turbulent times
in fact investments in etfs declined
sharply in april 2022 with high
inflation and the war in ukraine
contributed to reduced demand equity
etfs were particularly affected
the etf market is large and rapidly
growing with a wide range of products
for traders and investors but it can
also be a complex market and something
that can take some time to get to grips
with hopefully with this data and these
principles in mind more traders will
find etfs easier to understand
thanks for watching you can read all of
our original market analysis and data
led journalism on exchange traded funds
by visiting capital.com our recent
explainer video on the price of oil may
also be of interest to you you can watch
that by clicking in the box and of
course don't forget to subscribe to stay
alerted to more films on similar topics
in the future
you