(Investor's Business Daily) You didn't have to be a genius to make money with ETF investing this year. It just took being in the market — and it didn't even matter which one. Just don't expect investing to be so easy in 2020.
Nearly every type of stock, every corner of the globe and every asset class and sector delivered gains in 2019. And some gains where startlingly large. To not make money, you either had to be out of the market or really unlucky. Not one U.S. stock broad market ETF posted a loss for the year.
Simply owning the largest and oldest ETF, the SPDR S&P 500 ETF Trust (SPY), delivered a 32% gain this year including dividends. The year was all about growth. Invesco S&P 500 GARP ETF (SPGP) topped the U.S. market with its 39.9% return finding reasonably priced high-growth stocks.
With a whopping 30% gain as just the benchmark, grabbing returns of 40% or even more elsewhere during the year wasn't just doable but highly possible. Technology was the year's superstar. Technology Select Sector SPDR (XLK) returned more than 50%.
"Technology was the brightest spot with large-cap stocks like Microsoft (MSFT) and Apple(AAPL) climbing higher and market cap weighted ETFs that own heavy stakes, such as XLK ... significantly outperforming the broader market," said Todd Rosenbluth, head of ETF and mutual fund research at CFRA.
ETF Investing: The Chips Are Up
Technology ruled in 2019, but semiconductor stocks were true royalty. ETFs allowing investors to place early bets on the semiconductor industry's expected comeback in 2020 hauled in gains surpassing 60% practically across the board.
VanEck Vectors Semiconductor ETF (SMH) returned 66% during the year. The $1.5 billion ETF owns 25 of the largest semiconductor stocks listed on U.S. exchanges. Its No. 1 holding is Taiwan Semiconductor (TSM). Shares are up a blistering 58% this year, topping even the 56% gain by Microsoft.
But this semiconductor ETF is hardly unique. SPDR S&P Semiconductor ETF (XSD) returned 67% this year, followed by a 64% return of iShares PHLX Semiconductor ETF (SOXX).
Hopes are high that high-speed 5G wireless networking will spark a new upgrade cycle for smartphones and mobile electronics. All these devices will need new chips to power them. And positive developments on trade agreements are cutting tariff worries, which dogged the industry earlier in the year.
International ETFs: Good, Not Great
Staying diversified globally hurt more than it helped in 2020 with ETF investing. The largest international ETF, $78.5 billion Vanguard FTSE Developed Markets ETF (VEA) returned 23%. That's a whopper of a gain, roughly twice its historical annual return. But in a year that U.S. stocks are up so much, international was more of a drag.
Certainly, some spots of the world did better. IShares MSCI Russia Capped ETF (ERUS) returned 48.6%, while iShares MSCI Brazil Small-Cap ETF (EWZS) rose 49.4%. Many emerging parts of the world benefited from strong commodity returns. Energy and basic materials stocks account for 71% of iShares MSCI Russia Capped ETF.
Commodities mostly rose. Oil and precious metals rallied across the board. iPath S&P GSCI Crude Oil ETN (OILNF) returned 51.8% this year and U.S. Global GO Gold & Precious Metals Miners ETF (GOAU) returned 52%.
ETF Investing: Bond ETFs Rally, Too
Massive gains by stock funds stole the ETF investing show, but bond investors enjoyed strong returns, too. The largest bond fund, $67.9 billion iShares Core U.S. Aggregate Bond ETF (AGG), returned 8.6%. Those solid gains pale compared with other asset classes this year, but aren't far below the U.S. stock market's long-term 10% return.
Bond ETFs gained as the Federal Reserve cut short-term interest rates three times in 2019. The U.S. central bank responded to weak economic data. Falling interest rates make the prices of existing bonds rise.
Additionally, there's generational demand for income by the growing number of baby boomers retiring. More than $130 billion poured into bond ETFs in the first 11 months of the year, topping the $117 billion that flowed into stock funds, CFRA's Rosenbluth says. Bond ETFs haven't topped stock funds for flows since investors scrambled for safety during the 2008 Financial Crisis.
Losing Money Was Really Hard To Do
You really had to try to lose money. But it was possible and very costly.
Betting against the market was one of the most common ways to lose money while ETF investing. ProShares Short S&P 500 (SH), which falls when the S&P 500 rises, lost more than 20% this year. It then stands to reason that betting against technology stocks hurt even more given the sector rose so much. ProShares Short QQQ (PSQ) lost 28% this year.
Internationally, losses hit VanEck Vectors India Small-Cap ETF (SCIF), off 6.6%, iShares MSCI Chile Capped ETF (ECH), down 17%, and iShares MSCI Poland ETF (EPOL), down 6.7%.
Back in the U.S., a natural gas glut hammered United States Natural Gas ETF (UNG), delivering a loss of 29% on the year. That also hurt affiliated sector ETFs, like First Trust Natural Gas ETF (FCG), down 15%, and SPDR S&P Oil & Gas Exploration & Production ETF (XOP), down 9.1%.
ETF Investing: What's Next?
Diversification didn't help much in 2019 with ETF investing, especially internationally. But staying invested while limiting risk is as important as ever going into 2020, says Matthew Bartolini, head of SPDR Americas Research at State Street Global Advisors.
"After such a great run, today's risks seem more heavily skewed to the downside. We would caution investors who may be attempting to squeeze out those last few points of return or incremental yield," he said in a report. "It may not be worth the risk."
And that's a perfect world for ETF investors, where it's easy to keep costs rock-bottom low and diversify across asset classes. All the major brokers eliminated trading commissions on ETFs in 2019, making them even cheaper ways to get invested.
"As we enter the 2020s, indexing and ETFs are no longer a side show, they've become the main event," said Ben Johnson, Morningstar's director of global exchange traded fund research. "To the extent that this has resulted in significant cost savings for investors, this is something to celebrate."
