5 Underperforming ETFs to Avoid

You don’t want to invest in a sinking ship – or sector. And that’s why you should avoid these five underperforming ETFs at all costs right now.

Exchange-traded funds (ETFs) are an ideal trading vehicle for participants who want to take advantage of strength within a sector or industry. They afford easier access to specific market segments—and at less cost—than conventional mutual funds or a portfolio of individual stocks. But ETFs also offer investors another key advantage: they make it easier to see at a glance which industries are outperforming and which ones are underperforming the broad market. And you definitely don’t want to be invested in underperforming ETFs.

When you’re trying to decide which ETFs are likely to return a worthwhile profit, one of the best things you can do is to perform a quick relative performance check. This is done by comparing the fund’s recent price performance against the performance of a benchmark index, such as the S&P 500. This can provide a strong hint as to whether or not informed investors (e.g. institutional money managers and corporate insiders) are likely buying or selling the ETF you’re looking at.

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If the ETF is clearly outperforming the S&P—especially if the rest of the market has been weak—there’s a good chance the fund is in strong hands and will likely continue outperforming the market. By contrast, a fund that’s underperforming the benchmark index is likely in weak hands (i.e. small-time retail investors) and often continues its lagging performance for a prolonged period.

Another important method for separating winners from losers in the stock market is to focus mainly on stocks and funds that are persistently making new 52-week highs on the NYSE and NASDAQ, which can provide you with some ideas as to which market segments are likely to continue excelling. Think of the new highs as a proverbial “Dean’s list” of high achievers. Just as in academia, the students who make this prestigious list are the ones who typically continue to outperform their peers. Similarly, the stocks and ETFs which consistently make new 52-week highs normally (with special exceptions) continue this outperformance for an extended period.

Conversely, stocks and funds that consistently make new 52-week lows should typically (with rare exceptions) be avoided by investors. These are the market’s biggest losers, and they’re usually making new lows for a very good reason. If the ETF you’re considering for purchase is in an industry which has an above-normal representation on the 52-week lows list, you’ll want to avoid it as a matter of course.

In a previous report, we looked at some of the best-performing ETFs based on relative strength and saw that there was exceptional leadership in exchanged-traded funds focused on precious metals mining, internet services and the pharmaceutical industry, among others. But what about the ETFs which are reflecting abnormal levels of relative weakness versus the broad market averages? Many of these underperforming ETFs are in market segments which have recently shown up in the new 52-week lows list, meriting our attention.

Let’s take a look at some of them so that we can get an idea of the types of funds investors should be avoiding for now (or at least have limited exposure to).

5 Underperforming ETFs

Underperforming ETF #5: iShares U.S. Aerospace & Defense ETF (ITA)

Companies in the aerospace and defense industries have been serious laggards during the spring rally. The iShares U.S. Aerospace & Defense ETF (ITA) has conspicuously failed to keep pace with the SPX and has a lot of catching up to do in order to cover the lost ground from the March panic sell-off. Many primary military contractors—and more importantly, subcontractors—were adversely affected by the shutdowns and could take a while to rebound. For now, at least, this segment should be avoided by growth- and momentum-oriented investors.

The ITA is one of several underperforming ETFs to avoid now.

Underperforming ETF #4: Invesco Dynamic Leisure and Entertainment ETF (PEJ)

The leisure and entertainment industry was particularly hard hit by virus-related lockdowns, and it’s not expected by most analysts to stage a fast recovery once the lockdowns are over. Hotels, amusement parks, movie theaters and restaurants are among the firms that comprise this group, and they’re also represented in the Invesco Dynamic Leisure and Entertainment ETF (PEJ). Although the fund has recently rallied, its sustained weakness versus the S&P serves as a yellow flag to strength-oriented investors and should accordingly be sidestepped.

Underperforming ETF #3: SPDR S&P Bank ETF (KBE)

Banks—particularly smaller regional ones—have lagged the market during the shutdowns and are still showing an unusual degree of relative weakness, especially when measured against the large-cap S&P 500 Index. The SPDR S&P Bank ETF (KBE), which is a useful proxy for the industry, shows just how much the banks as a group have underperformed the SPX. In recent weeks, more than a few bank stocks have shown up on the new 52-week lows for both the NYSE and the NASDAQ, especially the latter. While bank stocks have recently shown signs of life and may eventually catch up to the large-cap index, it’s probably a good idea to be underweight the banks based on their underperformance and lack of forward price momentum.

The KBE is one of several underperforming ETFs to avoid now.

Underperforming ETF #2: Invesco DB Oil Fund (DBO)

The oil industry was especially hard hit in recent months by the collapse of crude oil prices due to falling economic activity. The pain being felt in the oil patch can be seen in the chart of the Invesco DB Oil Fund (DBO), which has dramatically underperformed the S&P 500. With the economy gradually opening back up, it’s possible that oil prices can recover, and with it, crude oil ETFs. But small investors should generally focus on areas of relative strength in the market while avoiding weak performers like this one.

Underperforming ETF #1: U.S. Global Jets ETF (JETS)

By far the biggest underperformers in the wake of the lockdowns have been airline stocks. Indeed, the airline industry is widely expected to remain under pressure for months—if not years—as travel restrictions and fear of contracting the virus will discourage millions of Americans from flying this year. It should come as no surprise then that the U.S. Global Jets ETF (JETS) is one of the market’s biggest underperforming ETFs so far this year. What’s more, it’s likely to continue underperforming and should be avoided.

JETS is one of several underperforming ETFs to avoid.

Based strictly on relative performance, these are among the worst-performing ETFs in the U.S. equity market right now. While past performance doesn’t guarantee future results, it usually pays to follow the path of the smart money traders and investors. And the ETFs discussed above appear to be among the least favored of this market-moving crowd.

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Timothy Lutts

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