Bitcoin boost propelled 2017’s best-performing ETFs

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The surge in the value of bitcoin last year helped a New York investment boutique claim the title of best-performing exchange traded fund of 2017. Ark Investments, which specialises in strategies based on new technologies and disruptive innovations, included an exposure to bitcoin in the Ark Innovation ETF, which delivered a total return of 87.4 per cent last year, according to unaudited data from Bloomberg. The company declined to disclose how much new money investors ploughed into the product, whose market value leapt from $12m to $367m last year. A sister fund, the Ark Next Generation Internet ETF, which also includes a bitcoin exposure, delivered a near-identical return of 87.2 per cent. Its assets jumped from $16m to $236m last year, suggesting it attracted significantly less inflows than its relative. The cryptocurrency exposures in both ETFs were held via stakes in the publicly traded Grayscale Bitcoin Investment Trust. Other holdings in the Ark Innovation ETF include Amazon, Twitter and Tesla, the electric carmaker. “A lot of our investors see these ETFs as hedges that provide protection against value traps elsewhere in their portfolio that have developed as a result of technology innovations and disruptions,” said Catherine Wood, chief executive of Ark. Ms Wood founded the company in 2014 after an investment career stretching more than 20 years that includes stints managing money at AllianceBernstein, Tupelo Capital and Jennison Associates. Ms Wood estimates that the innovation ETF would have delivered a return of close to 60 per cent last year without its bitcoin exposure. She expects to see demand for bitcoin continue to rise and for pricing volatility to subside if more financial instruments linked to the cryptocurrency are approved by regulators. Last week, the heads of the Securities and Exchange Commission, the US regulator, and the North American Securities Administrators Association, repeated warnings about the risk of cryptocurrency-related investment products. “Cryptocurrencies and investments tied to them are high-risk products with an unproven record and high price volatility. Combined with a high risk of fraud, investing in cryptocurrencies is not for the faint of heart,” said Joseph Borg, NASAA president. Both the Ark ETFs are actively managed and do not readily compare with most ETFs, which track broad indices according to rules that determine when and which securities can be bought or sold by an ETF manager. Among traditional index-tracking ETFs that do not use debt to multiply returns, the best performers of 2017 were thematic ETFs linked to technology stocks in emerging markets. WisdomTree, the New York-based asset manager, delivered a 78 per cent return in 2017 on the $167m WisdomTree China ex-State-Owned Enterprises fund that excludes companies in which the Chinese government owns a holding of more than 20 per cent. Chinese state-owned enterprises are widely seen as less efficient than privately run companies but they account for a significant share of conventional market capitalisation-weighted China funds due to their size. “Nearly 50 per cent of the MSCI China index is made up of state-owned enterprises but these traditional benchmarks are flawed and force investors to invest alongside the Chinese government instead of in more profitable private companies,” said Gaurav Sinha, an asset allocation strategist at WisdomTree. “The ETF in comparison is more focused on the consumer, healthcare and technology sectors with less exposure to big banks and energy companies. This is the direction in which the Chinese economy is moving.” Guggenheim, the US asset manager, KraneShares, a China-focused ETF boutique, and Invesco PowerShares, the world’s fourth-largest ETF provider, all enjoyed strong returns from ETFs that are exposed to the Chinese technology sector. Guggenheim’s $407m China Technology ETF, which has substantial holdings in Tencent, Alibaba and Baidu, registered a 74.3 per cent return last year, while KraneShares CSI China Internet ETF delivered a 69.6 per cent return in 2017 and ended December with assets of $1.3bn. The $247m PowerShares Golden Dragon China fund tracks a basket of Chinese companies that also have a US listing and is heavily weighted towards the information and technology sectors. It attracted net inflows of $33.6m in 2017 and registered a total return of 60 per cent. A pair of US-listed ETFs that provides exposure to companies involved in the supply of metals for electric car batteries also performed strongly last year. The $182m VanEck Vectors Rare Earth/Strategic Metals ETF returned 81.4 per cent, while the more tightly focused $1.1bn Global X Lithium & Battery Technology ETF delivered a 64 per cent return. On the other side of the ledger, drastic losses were recorded by several exchange traded notes linked to US stock market volatility, which sank in October to its lowest levels since the 1960s. Volatility ETNs use derivatives and are employed mainly by professional investors as hedges to protect themselves against violent swings in equity prices. But volatility remained muted throughout last year’s rally for US equities, which propelled the benchmark S&P 500 index to an all-time high at the end of December. As a result, the largest volatility ETN, the Barclays iPath S&P 500 VIX Short-Term Futures ETN, widely known as VXX, fell 72 per cent last year. Other volatility ETNs that pursued a similar strategy offered by ProShares and VelocityShares suffered similar hefty losses.

Source: ft.com