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.
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 oil exploration and services. 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). This list excludes leveraged or inverse funds as well as those invested in Russian equities.
5 Underperforming ETFs
Underperforming ETF #5: ARK Fintech Innovation ETF (ARKF)
The high-growth companies that led the post-pandemic market rally have been the worst laggards since the growth market selloff that began late last year. The ARK Fintech Innovation ETF (ARKF) has conspicuously failed to keep pace with the SPX and has a lot of catching up to do in order to cover lost ground. This fund is predominantly invested in companies that facilitate digital payments, either through blockchain technology or through payments processing and e-commerce services. The top holdings are Block (SQ), Coinbase (COIN) and Shopify (SHOP), and the fund is down 46.8% YTD.
Underperforming ETF #4: Global X Blockchain ETF (BKCH)
The second ETF on our list is another fund with significant exposure to “risk-on” investments in the digital financial space, the Global X Blockchain ETF (BKCH). Like ARKF, this fund has significant exposure to Coinbase and other companies involved in “digital asset mining, blockchain & digital asset transactions, blockchain applications, blockchain & digital asset hardware, and blockchain & digital asset integration.” The fund, which just launched last year, peaked with growth stocks in November before coming down 70% from those highs; it’s off 47.1% YTD.
Underperforming ETF #3: Defiance Next Gen Altered Experience ETF (PSY)
Recreational and medicinal cannabis stocks experienced their most recent peak in February of 2021 and have been trending lower since. So it’s no surprise that the Defiance Next Gen Altered Experience ETF (PSY) has been trending lower as well. This fund invests in companies exploring “medical psychedelics, medical cannabis, cannabis pharmaceuticals and cannabidiol (“CBD”) derivatives, and ketamine,” specifically with an emphasis on alternative treatments for mental health conditions. The fund is down more than 70% since its inception in 2021 and is 48.2% lower YTD.
Underperforming ETF #2: AdvisorShares Poseidon Dynamic Cannabis ETF (PSDN)
Like the Altered Experience ETF, the AdvisorShares Poseidon Dynamic Cannabis ETF (PSDN) is primarily levered to the cannabis sector. Unlike Altered Experience, however, this fund is an actively managed ETF that uses financial derivatives and some leverage to gain exposure to recreational or medicinal cannabis companies, primarily via swaps. Top holdings will be familiar names to subscribers of Cabot SX Cannabis Advisor, but unlike that portfolio, this ETF has been fully invested since its inception in November 2021 and is down 60% in six months’ time and 50.2% in 2022.
Underperforming ETF #1: ARK Innovation ETF (ARKK)
If you’ve identified a trend in this list you’re not wrong. The biggest losers thus far in 2022 were (or would have been) the top performers coming out of the pandemic. It’s only fitting that the ARK Innovation ETF (ARKK), Cathie Wood’s high-profile “disruptive innovation” fund, caps off our list. Although this fund rocketed almost 300% from the pandemic market bottom, it’s down 50.3% in 2022 and is currently trading below pre-pandemic levels.
That high-growth stocks and ETFs have spent most of this year in the market’s crosshairs should come as no surprise to regular Cabot readers. 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.
If you want the best-performing growth stocks right now, I highly recommend subscribing to our Cabot Top Ten Trader advisory, where every week Chief Analyst Mike Cintolo provides you with some of the market’s strongest growth stocks from both a technical and a fundamental perspective.
To learn more, click here.