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Last year’s winners tell you nothing about this year

The last seven years have seen very little persistence in performance in local exchange-traded products.

There are currently around 100 exchange-traded funds (ETFs) and exchange-traded notes (ETNs) listed on the JSE. They allow investors to gain exposure to everything from the price of corn to global government bonds.

One of the key features of these products is that each of them gives investors access to a particular asset or asset class. This makes them a good proxy for markets as a whole.

If Japanese equities have a good year, there are exchange-traded products in South Africa that will reflect this. If the price of oil falls, there are local exchange-traded products that will capture that too. In other words, the performances of local ETFs and ETNs are a good reflection of how many of the world’s equity, bond, currency and commodity markets are moving.

Investors can therefore learn a lot by following the performance of these products. One lesson in particular is that an asset or asset class that does very well one year is highly unlikely to repeat that performance the next.

No persistence

Over the past seven years it has only happened once that a locally listed exchange-traded product was the top performer two years in a row. That was last year, when the Standard Bank AfricaRhodium ETF topped the performance list again after being the best performer in 2017.

Read: The top-performing exchange-traded products of 2018

As the tables below indicate, however, this stands out as an exception. Since 2012, there are no other instances of any product being in the top three for two consecutive years.

Top-performing exchange-traded products year-by-year
2012 2013 2014 2015
Satrix INDI ETF DB x-tracker MSCI USA ETF Proptrax 10 ETF DB x-tracker MSCI Japan ETF
NewFunds eRAFI FINI ETF DB x-tracker MSCI Japan ETF Stanlib SA Property ETF BNP Paribas GURU Europe ETN
DB MSCI Africa Capped 50 ETN DB x-tracker EuroSTOXX 50 ETF Satrix FINI ETF NewWave USD Currency ETN

 

Top-performing exchange-traded products year-by-year
2016 2017 2018
NewFunds S&P GIVI SA RESI 15 ETF Standard Bank AfricaRhodium ETF Standard Bank AfricaRhodium ETF
CoreShares Green ETF DB MSCI China ETN NewPalladium ETF
Satrix RESI ETF Standard Bank Palladium-Linker ETN Standard Bank AfricaPalladium ETF

Source: Profile Media, etfSA.co.za

What is even more telling is that apart from the rhodium and palladium funds that appear in both 2017 and 2018, there is only one other fund that repeats in these tables at all. That is the DB x-trackers MSCI Japan ETF (now the Sygnia Itrix MSCI Japan ETF) that appears in 2013 and 2015.

No other product appears more than once as a top-three performer in this whole seven-year period.

Change in fortunes

There are however two examples of funds that had a complete reversal in fortunes from one year to the next. This happened between 2015 and 2016.

In 2015 the BNP Paribas GURU Europe ETN was the top performer and the Satrix RESI was the worst performer. In 2016, however, the BNP Paribas GURU Europe ETN was at the bottom of the performance charts, while the Satrix RESI finished the year with the third highest return.

These are the most extreme examples of this happening, but are by no means the only cases of a product going from one end of the performance tables to the other. In both 2016 and 2017 the Standard Bank Wheat ETN was among the three worst-performing exchange-traded products on the JSE. Last year, it was in the top 10.

Similarly, the NewWave USD Currency ETN was the third worst performer in 2017. For 2018 it was the seventh best.

Picking winners

For investors the lesson should therefore be clear that picking products based purely on how they performed the year before is extremely unlikely to be a successful strategy. It is quite possible for a fund to go from being a top performer to a bottom performer, and vice versa.

While the growth in exchange-traded products on the JSE has given investors greater choice through the ability to invest in very specific markets, this does come with additional risks. Trying to determine which specific commodity, currency, sector or equity market is likely to outperform from one year to the next can be a rather hazardous pursuit.

You may blow the lights out with a rhodium ETN that gives you a 100% return in a year. But over the same 12-month period you could have lost nearly a quarter of your money in products tracking the price of corn or wheat.

For traders, this kind of volatility may create opportunities, but for long-term investors it is not desirable. The better approach is to buy and hold a broadly diversified equity market index that is going to deliver over a number of years.

It is notable that over this entire seven-year period the Sygnia Itrix MSCI World ETF (formerly the DB x-trackers MSCI World ETF) was never among the top three performers for a calendar year. Yet over these full seven years it is the third best performer overall.

This is the most broadly diversified product available to investors on the JSE, and has more than shown its value. It is also proof that there is no need for investors to try to chase performance every year in order to receive attractive long term returns.

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The article provides a good illustration of market reality. For most people having the long term in mind it definitely better to stick with winners in the 5-10 year race.

Indeed, one agrees that in (many) cases, by picking “last year’s loser” (be it a fund, or sector/asset class), the chances are you’re better positioned (from an historic low) for the next year or cycle.

Then I cannot help to chuckle: where does the well-known term (used by traders) “THE TREND IS YOUR FRIEND” fits into the overall picture?
The above probably only relevant on a micro scale, e.g. single asset trading(?) instead of larger funds/sectors. Comment?

And yet current number 2 article on editors pick is

‘The top-performing exchange-traded products of 2018’

Go figure…

There is nothing in that article that suggests that it should be used as a guide for anything. It is providing an analysis of last year’s market.

Every financial commentator states that one should not use past performance to chose an EFT, Unit trusts and other funds. However in most instances this is the only information readily available to the general public so is what they can use. Maybe one of the financial commentators should write an article detailing how one should pick a fund with information available to the man in street rather than simply stating how it should not be done.

Selection of EFT, is in my opinion, very similar to selecting Unit trusts. The basis used to determine the Asset Allocation (see Patrick’s article September 2018 “What’s more important – asset allocation or stock picking?”) hold true for selecting EFT’s. Once one has the asset class, one looks for the EFT’s that support class. There may be a few, so it would be up to you to determine which offering, best suites your need.

Headline is misleading. Last year’s winners tell you very little about who this year’s winners will be but tell you a lot about last year and allows one to add incrementally to the long-term picture by adding last year’s performance.’

There are currently around 100 exchange-traded funds (ETFs) and exchange-traded notes (ETNs) listed on the JSE. They allow investors to gain exposure to everything from the price of corn to global government bonds.

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