Factor ETFs such as value and size staged a dramatic comeback in the first half of the year with many of the trends set in the first quarter maintaining pace as the recovery trade rolled on. 

The tentative relaxing of lockdown restrictions was accompanied by a bounce back from ‘old economy’ cyclical equities, as illustrated by the Xtrackers S&P 500 Equal Weight UCITS ETF (XDWE) outperforming its parent ETF, the Invesco S&P 500 UCITS ETF (SPXS), by 1.1% so far this year, as at 30 June.

Other notable trends include a surge in commodity prices with the aggregating Bloomberg Commodity index up 19% in 2021, as at 6 July. 

This, in turn, saw the US consumer price index (CPI) hit 5% in May, representing the core inflation metric’s fastest pace of growth since 2008, as electrical components, agricultural produce and industrial metals supply chains remain stretched and set against a backdrop of pent-up consumer demand.

The subsequent effect of these monetary considerations was a steep rise in the yield curve of US Treasuries, and while this began to taper off following the Federal Open Market Committee’s (FOMC) hawkish announcement in June, this was too little too late in terms of reversing the difficult start to the year for fixed income ETFs.

The winners of the H1 recovery trade

Unsurprisingly, energy equities dominated the winners’ circle for the first half, with oil regularly the best-performing commodity during economic recoveries and mineral extraction equities buoyed by a sharp influx in demand.

Though eight of the top ten best-performing ETFs of H1 were related to businesses in the energy industry, the top performer within the category was the iShares Oil & Gas Exploration & Production UCITS ETF (SPOG) which returned 51.6% in the first half of the year.

Having finished as the best-performing fossil-fuel-focused ETF during the first three months of the year, SPOG retained its trajectory and topped the overall performance rankings as manufacturing and travel began to come to life in the first half of 2021.

Though not related to the recovery trade, the Rize Medical Cannabis and Life Sciences UCITS ETF (FLWG) was the top-ranked non-energy European ETF during H1, booking impressive returns of 32.6%.

While falling by 3.6% from its standing at the end of Q1, FLWG was able to retain much of the progress it had made off the back of Joe Biden’s election platform with the Democrat president overseeing cannabis legalisations on a state level and even discussing the possibility of legalisation at a federal scale.

Though ceding its position as the top-performing ETF by the end of Q1, the Xtrackers Physical Rhodium ETC (XRH0) clung onto 32.2% of its gains in 2021, down from 73.6% during the first three months of the year and only putting a narrow dent in the more than 3,000% returns booked over the past five years.

While suffering due to a rotation away from growth stocks and underperforming supply chains delaying manufacturing, XHR0 has benefited from the surge in value of rhodium, led by demand for vehicles using it as a core component in catalytic converters and heightened demand for electric vehicle battery metals, according to S&P Global Platts.

Behind XRH0 was a more conservative play combining two factors into one strategy, the SPDR MSCI USA Small Cap Value Weighted UCITS ETF (USSC), which returned 30.9% during H1.

At the nexus of a factor comeback, USSC benefited from its value and small cap bias, as well as its US exposure, which meant it focused on one of the biggest winners (geographically) of the early pandemic recovery.

As a more minor note, USSC temporarily had outsized exposure to meme stocks such as GameStop and AMC, which gave it an extra lease of life during the beginning of the year. 

Finally, as a more wildcard exposure, the Xtrackers LPX Private Equity Swap UCITS ETF (XLPE) returned 29.5% during the six months of the year, as recovery optimism saw global private equity deals reach a combined value $500bn in H1, the highest combined sum for the period in 40 years.

Recovery casualties

While many societies and economies might be embracing the relative return to normality with open arms, many of the growth – especially tech-centric – stocks that thrived during the coronavirus pandemic fared worst when lockdown restrictions began to loosen.

A prime example of this was the Rize Education Tech and Digital Learning UCITS ETF (LRNG), which returned -25.1% in H1 as children across the developed world began returning to classrooms.

Having launched on 27 August, LRNG’s day in the honeymoon period was short, followed by a more drawn-out downturn as the physical economy began staging a comeback.

Though not seeing downturns because of any characteristic associated with pandemic recovery, some single country exposures were certainly left behind by the feel-good spirit enjoyed by equities in most regions. Illustrating this, the iShares MSCI Turkey UCITS ETF (ITKY) topped the worst-performers for Turkey exposures, returning -22.3%, while the HSBC MSCI Indonesia UCITS ETF (HIDR) returned -15.2%.

Having stood as the worst-performer during Q1, ITKY continued its bad run during Q2, led by president Recep Erdogan falling out with European Commission chief, Ursula von der Leyen, with Italian prime minister, Mario Draghi, going further and dubbing Erdogan a ‘dictator’. 

In the case of HIDR, the ETF ran into friction in Q2 due to heightened COVID-19 fears which were escalated by the declaration of an oxygen supply crisis in the country.

Directly impacted by the recovery trade was the iShares Global Clean Energy UCITS ETF (INRG), which shed -17.8% during H1.

Having enjoyed returns exceeding 120% in 2020, Europe’s largest clean energy ETF became a victim of its own success with a ‘recovery by any means necessary’ taking a lot of the heat off the enthusiasm needed to maintain its lofty valuation while its popularity in 2020 prompted a rebalance in H1 of this year.

Similarly, the VanEck Vectors Junior Gold Miners UCITS ETF (GJGB) returned -13.2% in the first half of the year with gold as an asset thriving during periods of volatility and struggling as risk-on assets surge. Compounding this, the companies mining the precious metal tend to see outsized returns during gold bull run and outsized losses when its popularity wanes – explaining GJGB’s notable losses, despite a bounce back in gold prices between April and June.

Finally, the iShares $ Treasury Bond 20+yr UCITS ETF (DTLE) also lost out due to recovery optimism falling 12.9% in H1.

With inflation running hot and investors keeping a close eye during the start of 2021, long-duration bonds spent much of the period out-of-vogue with anticipation building that monetary tightening by policymakers would diminish returns on longer-dated debt.

This sensitivity to interest rates in ETFs such as DTLE was only probed further by central banks, like the Federal Reserve, announcing their plans for interest rate hikes over the past couple of months.

DTLE also finished bottom of the pack for longer-duration bond ETFs not only because of the Fed’s relatively hawkish tone but also because of its euro hedge mechanism, with the currency having underperformed relative to its developed market peers in H1.

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