3 Hit And Flop Zones Of Q3 And Their ETFs

For the broader stock market, Q3 has been the worst quarter with never-ending woes starting from Grexit concerns, China-led deceleration fears to the latest biotech meltdown. Global growth worries, slumping commodities, sluggishness in other developed and developing markets, and an uncertain Fed policy added to the chaos.

A slew of worries sent the major U.S. bourses into the correction territory in quick succession from its July peak with little signs of a revival any time soon. Notably, the S&P 500 index is on track to post its worst third-quarter performance in four years. The index is down 8.7% over the past three months.

Let’s see how these situations have impacted the ETF world. While most corners of ETF investing performed terribly during this time period, a few areas have delivered handsome returns.

Best Zones

Volatility ETFs

Volatility products have been investors’ darling during the third quarter as these tend to outperform when markets are falling or fear levels over the future are high, both of which happened lately. While all the ETFs in this space enjoyed smooth trading, C-Tracks on Citi Volatility Index ETN (CVOL - ETF reportis the biggest winner, having surged nearly 41% in value (see: all the Volatility ETFs here).

The note provides investors direct exposure to the implied volatility of large-cap U.S. stocks. The benchmark combines a daily rolling long exposure to the third- and fourth-month futures contracts on the CBOE Volatility Index with short exposure to the S&P 500 Total Return Index. The product has amassed $5.2 million in its asset base while charging 1.15% in annual fees from investors. The note trades in good volume of about 124,000 shares per day.

Long/Short ETFs

Amid the ongoing uncertainty and heighted volatility, investors seek alternative investments like long/short strategies to lower risk in their portfolio. This strategy takes the best of each bull and bear prediction by involving buying and short selling of equities at the same time. It involves taking long positions (buy) in stocks that are expected to increase in value while short positions (short sell) in stocks that are expected to decrease in value.

That being said, U.S. Market Neutral Momentum Fund ((MOM - ETF report)) has gained nearly 16%. This fund looks to provide spread returns between high and low momentum price stocks within the Dow Jones U.S. Index. This is easily done by tracking the Dow Jones U.S. Thematic Market Neutral Momentum Index, which takes long position in the highest momentum stocks and short position in the lowest momentum stocks in equal weights and equal dollar amount within each sector (read: 6 Exceptional ETFs Up Over 15% YTD).

This approach results in long and short positions in 400 stocks, divided equally. Due to this unique feature and some active management, the fund charges a higher annual fee of 1.49% from investors. However, MOM is often overlooked by investors as depicted by its AUM of $2.8 million and average daily volume of around 2,000 shares.

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Disclosure: None.

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