GDXJ VanEck Junior Gold Miners ETF

While the last few days have been rocky in the markets, it has generally been a positive start to 2012 for most equities. Broad markets have risen sharply in the first quarter, and while April began with some volatility, it appears as though stocks are fighting their way back from this uncertainty too.

In fact, of the nine major sectors of the U.S. economy, eight are in the green for the year with only utilities still in the negatives for the time period. Beyond U.S. shores, a similar trend has taken place in some broad international markets too; total market, emerging nations, and single country ETFs have mostly risen on the year, with many adding more than 10% so far in the time frame (see more in the Zacks ETF Center).

However, while the broad market gains have boosted many equity ETFs, they have been a few exceptions to the rising tide so far this year. Of this group, there are even a few funds that have lost more than 10% on the year, a pretty impressive feat considering that the S&P 500 has gained more than 10% in comparison, suggesting at least these few losers can have low levels of overall correlation (you have to look on the bright side right?).

For Friday the 13^th, we take a look at three of these unlucky ETFs that have underperformed broad markets by so much this year. Below, we highlight these funds and why they haven’t been able to match their counterparts in terms of performance, despite overall market strength to start 2012:

iShares MSCI-Spain Index ETF (EWP)

In the European ETF sphere, it has been a rocky start to the year to say the least. Although optimism abounded over the PIIGS bloc early on, that quickly faded in early March and April as investors honed in on Spanish and Italian bonds.

In the case of Spain, events are especially bad thanks to record youth unemployment and increased uncertainty over funding sources. In fact, yields on 10 year government bonds in the country are once again approaching 6%, a danger level for the highly indebted nation (read Spain ETF Slumps On Weak Bond Auction).

Thanks to these worries, the Spain ETF has been among the worst equity ETFs so far in 2012 as the fund has declined by 10.2% since the start of the year including an 8.5% slump in the past week alone. The fund’s structure also hasn’t helped, as the ETF is prone to significant volatility based on its sector exposure.

EWP actually has more than two-fifths of its portfolio in financial institutions, one of the worst areas to be in if Spain looks to face more bond troubles. Furthermore, all three of the fund’s top three holdings—Banco Santander (STD), Telefonica (TEF), and BBVA—have lost more than EWP this year and the two bank stocks have lost more than 13% in the past week alone.

Given the financial heavy construction of this ETF and the woes that Spanish debt has experienced in recent weeks, it is easy to see why this ETF has been so unlucky this year. Fortunately, lower rates can easily turn things around for this fund, while the yield, thanks to low stock prices, is among the highest in the European ETF space.  

First Trust ISE-Revere Natural Gas Index Fund (FCG)

Another big loser so far this year has been in the field of natural gas. The important commodity has is now trading below $2 in commodity markets while UNG has collapsed by nearly 42% since the start of January.

This extreme weakness is largely due to bad luck in terms of weather and technology this year. An unseasonably warm winter curtailed natural gas demand across the country while supplies—thanks to new fracking technologies—are increasing at a phenomenal rate. Thanks to this confluence of factors, FCG has been under significant pressure as the equity representative of the sector losing double digits before Thursday’s surge moved the loss to just 6.9% for the period.

This underperformance when compared to the broad market should be expected given the weakness in the underlying commodity so far in 2012 and the bearish outlook for the product going forward. However, given the multitude of uses for natural gas and the potential for the product as an export, FCG’s luck could turn around later this year. (see Have The Natural Gas ETFs Finally Bottomed Out?)

Yet with that being said, it will take a whole lot of luck to get this fund back in the green as the ETF has lost 23% over the past 52 week period and 14% since inception in 2007. Additionally, the inclusion of a great deal of mid and micro cap securities could spike volatility and make this a shaky choice going forward as well.  

Global X Gold Explorers ETF (GLDX)

Thanks to a strong equity market, there has been little desire for safety assets like U.S. Treasury bills or gold. This comes despite relative weakness in the U.S. dollar, a situation which tends to be a positive catalyst for the precious metal.

Instead, it appears as though the broad move towards risky assets has took over gold trading for the time being, leaving the metal in a bad slump after its solid run in February. Since gold mining companies tend to be a leveraged play on the underlying price of gold, they can often be even more impacted than their bullion tracking counterparts.

Due to this trend, the risky and small cap focused Gold Explorers ETF has seen some severe weakness to start 2012. The ETF rose in tandem with gold in January—before truly taking off—only to slump back harder than the precious metal in March and April (see Has The Junior Gold Mining ETF Lost Its Luster?).

This extreme volatility likely comes from the breakdown of the fund and its relatively concentrated nature. The gold explorer ETF only holds 26 securities in its basket and puts just 5% of its portfolio in stocks that are mid cap sized or bigger.

Thanks to this, and significant exposure to the CAD/USD exchange rate, this unlucky ETF has seen a standard deviation of 46.8% over the past six months. Considering that GLD has a standard deviation of 24.3% and GDX has one of 37.65%, it shouldn’t be too surprising to see that when things go bad GDXJ tends to do much worse than its larger counterparts in the space.

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