5 Best ETFs Of The First Half: Volatility, Internet Names Rule

The S&P 500 is starting the third quarter with a year-to-date gain of 2.5 percent. While that number looks good, looks can be deceiving. Markets have been anything but docile through the first six months of the year.

Consider this anecdote. As the title of this piece indicates, the five best-performing exchange traded funds of the first half are highlighted here. The top four members of that group are exchange traded notes designed to rally when volatility spikes. The worst performer in the quarter is up “just” 31.84 percent year-to-date.

With so many of the first half's best-performing ETFs being volatility ETNs, those products will be grouped together as we highlight some of the winners from the ETF space in the first half.

iPath Series B S&P 500 VIX Short-Term Futures ETN VXXB

The iPath Series B S&P 500 VIX Short-Term Futures ETN is one of the prime examples of why volatility ETNs are designed for short-term traders and are ill-advised as a long-term investment. Yes, VXXB is the first half's best-performing exchange traded product, with a gain of 35.44 percent, but much of the gains were accrued during a brief volatility spike in February.

Even with a gain of almost 11 percent last week, VXXB plunged nearly 25 percent in the second quarter. The ETN is still home to over $139 million in assets under management.

VXXB's underlying index “offers exposure to a daily rolling long position in the first- and second-month VIX futures contracts and reflects market participants’ views of the future direction of the VIX index at the time of expiration of the VIX futures contracts comprising the index,” according to the issuer.

Other high-flying volatility products during the first six months of 2018 include the VelocityShares VIX ST ETN VIIX and the iPath S&P 500 VIX ST Futures ETN VXX.

See Also: 5 Worst ETFs Of The First Half: Emerging Markets Pain

iPath Bloomberg Cocoa Subindex Total Return ETN NIB

Cocoa was the best-performing commodity in the first half of the year, as highlighted by a gain of nearly 31 percent for the iPath Bloomberg Cocoa Subindex Total Return ETN. Drought conditions in some of the major West African cocoa-producing countries have lifted the commodity in the first six months of the year.

Cocoa is a volatile commodity, and the market is already pricing in expectations of increased production. The scenario is reflected in NIB's second-quarter tumble of 7 percent.

“The International Cocoa Organisation is forecasting a surplus of 105,000 tonnes in the current 2017-18 marketing year, as global production is estimated at 4.6 million tonnes,” according to Business Ghana.

Invesco S&P SmallCap Health Care ETF PSCH

Health care is one of a small number of sectors in the green this year. The Invesco S&P SmallCap Health Care ETF highlights the dichotomy between the sector's large- and small-cap names. Most traditional large-cap health care ETFs are up barely more than 1 percent year-to-date, while the small-cap PSCH is higher by 30.42 percent, easily making it the first half's best-performing sector ETF.

PSCH has also been buoyed by the continued outperformance of growth stocks in lieu of value fare. More than three-quarters of PSCH's 72 holdings are considered growth stocks. The ETF allocates over 55 percent of its combined weight to medical device makers and health care services providers.

SPDR S&P Internet ETF XWEB

Of the 20 best-performing non-leveraged ETFs in the first six months of 2018, six are internet funds. The leader of the pack is one of the newest and smallest: the SPDR S&P Internet ETF. XWEB, which turned two late in the second quarter, is up almost 29 percent this year.

XWEB tracks the S&P Internet Select Industry Index, which is an equal-weight benchmark. The ETF is not highly dependent on the likes of Amazon.com Inc. AMZN or Alphabet Inc. GOOGL to drive returns. In fact, neither of those stocks are among XWEB's top 10 holdings.

United States Oil Fund USO

Among the mainstream commodities, oil was the best performer in the first half of the year. Led by USO, which gained 25.4 percent over the first two quarters, four oil funds were among the first half's top 20 non-leveraged ETFs. USO, one of the largest commodities ETFs, tracks front-month West Texas Intermediate futures.

USO's climb is undoubtedly impressive when considering the dollar is strong and that the U.S. is pumping oil at or near all-time highs. Last month, the Organization Petroleum Exporting Countries agreed to up output to take advantage of higher prices — and USO still managed to climb 11.14 percent.

Saudi Arabia “and non-OPEC nations, including Russia, had agreed on June 22 to boost production by a combined 700,000 to 1 million barrels a day, so any 2 million bpd-increase would be at least double market expectations,” according to Reuters.