Role reversal: best ETF performers in 2021

Brian Bridger, CFA

May 24, 2021

Less than five months in, and 2021 has already been an exciting year for Canadian ETFs. In February, Purpose Bitcoin ETF (TSX: BTCC), became Canada’s first Bitcoin exchange-traded fund. Since then, a handful of companies have launched similar ETFs tracking Bitcoin and other crypto currencies, such as Ethereum. There are now two dozen crypto currency ETFs, giving retail investors easier access to this new asset class. In total, 93 new ETFs have already been launched in 2021. Aside from the crypto funds, other popular themes include ESG funds, as well as funds focusing on niche sectors such as genomics and space innovation.

Some of the best-performing categories as defined by the Canadian Investment Funds Standards Committee (CIFSC) so far in 2021 were some of the worst performers in 2020. Energy Equity ETFs lost an average of 32% in 2020, the steepest losses of any category. However, they are the top-performing funds through the first four months of 2021, up over 25%. The next best-performing category year to date (YTD) is Financial Services Equity, gaining an average of 22%. Last year, this category was close to the bottom of the pack, losing 4%. Table 1 shows the top five categories YTD, as of April 30.

Similarly, four of the bottom five categories YTD were top-10 performing categories in 2020. Canadian Long Term Fixed Income, the worst so far, is down over 11%. In 2020 these funds gained almost 12%. Next is Precious Metals Equity. These funds are down over 10% this year after gaining over 23% last year. Table 2 lists the bottom five categories YTD, as of April 30.

With the ever-increasing number of ETFs in the Canadian market, the Fundata FundGrade ratings are a quick way to narrow down your search when looking for potential investments. The Fundata FundGrade A+® Awards are handed out in January and are based on monthly FundGrade ratings over the past calendar year. Monthly FundGrade ratings consider up to 10 years of risk-adjusted performance. ETFs and retail mutual funds are graded in the same peer group within their respective CIFSC categories. (Visit www.fundata.com for the full methodology.) Now let’s look at two A+ Award winners from 2020 as well as an ETF vying for its first A+ Award in 2021.

BMO MSCI All Country World High Quality Index ETF (TSX: ZGQ). This fund was launched in 2014 and replicates the MSCI All Country World High Quality Index. This is a rules-based index that screens global equity markets for companies with high return on equity, stable earning growth, and low leverage. Top holdings include Microsoft, Apple, and Taiwan Semiconductor Manufacturing Co.

ZGQ has been a first-quartile performer in the Global Equity category in five of the six calendar years since its inception. The 5-year average annual compounded rate of return of 17.1% has exceeded the benchmark by 4 percentage points. And its 3-year standard deviation (SD) of 12.4% is below the category average of 14%. These superior risk-adjusted returns have earned ZGQ the FundGrade A+ Award in three of the past four years, including it’s most recent in 2020.

ZGQ has an MER of 0.51%, a yield of 1%, and a risk rating of Medium.

Horizons Pipelines & Energy Services Index ETF (TSX: HOG). This ETF tracks the Solactive Pipelines & Energy Services Index, which is designed to provide exposure to Canadian midstream oil and gas companies. The portfolio is very concentrated, consisting of only 12 holdings, including industry giants Enbridge and TC Energy.

HOG debuted in 2014 and is a top performer in the Energy Equity category. In fact, over the past five years, it is the only fund in the category with a positive return, gaining 6% while the average Energy Equity fund has lost over 5%. Add to this a below-average standard deviation, and it is no wonder this fund has earned FundGrade A+ Awards for the past four years.

HOG has a trailing 12-month yield north of 4%, an MER of 0.64%, and a risk rating of Medium to High.

Evolve Innovation Index Fund – Hedged ETF (TSX: EDGE) debuted in 2018, making 2021 the first year it is eligible for an A+ Award. It has been a top-quartile fund over the past two calendar years, outperforming the Global Equity benchmark by 40% in 2020. Over the past year, EDGE has the second-highest return in the category, gaining 74%. However, these outsized returns come with additional risk. The 2-year standard deviation is over 20%, well above the category average of 15%.

EDGE tracks the Solactive Global Innovation Index by investing in companies around the world that are involved in “disruptive innovation themes.” This includes industries such as cyber security, esports, and fintech, to name a few. EDGE also invests in other Evolve ETFs to gain exposure to additional companies and sectors. Underlying funds include CYBR, HERO, CARS, and DATA.

EDGE has an MER of 0.5% and a risk rating of Medium to High. There is also an unhedged U.S. dollar version available (TSX: EDGE.U).