ETF's by definition are baskets of different assets -- such as stocks, commodities or bonds -- and trade close to their net asset value. Because of this -- and the fact that most ETFs track an index -- ETFs are less influenced by short-term noise, and more likely to reflect larger underlying fundamental factors.
Bets on volatility, natural gas and Russia have not worked well this year, based on the returns of the major ETF's that cover those themes. But on the winning side are themes based on coffee, India and precious metals.
The Business of Beans
Coming in as the top ETF so far this year is the iPath Dow Jones-UBS Coffee Total Return (JO) with a whopping 63.30 percent year-to-date return. The grande to that venti is the iPath Pure Beta Coffee (CAFE) which has a nearly as impressive 57.58 percent return so far in 2014. The success of these two ETF's is caused by the surge in coffee prices driven by one of the worst droughts seen in the last 50 years in Brazil, which is the world's top producer and exporter.
The second most profitable theme has been investing in India. Four of the top 10 ETF's track the business climate in the world's second-most populous country. In particular, ETF's that invest in small cap companies and infrastructure in India have done well in anticipation of business friendly reforms that most experts expect new Prime Minister Narendra Modi will put in place.
The Market Vectors India Small-Cap (SCIF), EG Shares India Small-Cap (SCIN), iShare MSCI India Small-Cap (SMIN), and EG Sharex India Infrastructure (INXX) have returned, 60.79 percent, 47.04 percent, 43.61 percent and 37.97 percent respectively year-to-date.
The continued optimism in India is echoed by Steve Cucchiaro, chief investment officer of the world's largest ETF strategist, Windhaven Investment Management who says, "If there's ever a place that has so much potential and so much room for improvement in infrastructure and so many other things, you have to say India is that place."
The final winning theme revolves around precious metals, but not the underlying commodities themselves. Instead, ETF's that follow junior miners -– small exploration firms with higher volatility, but larger potential upside movement -– have done the best.
Global X Gold Explorers (GLDX) has returned 43.09 percent, and Market Vectors Junior Gold Miners (GDXJ) has increased 32.66 percent. Pure Funds ISE Junior Silver Small Cap Miners/Explorers (SILJ) has returned 43.04 percent so far this year.
If that scenario plays out, the junior miners will benefit most from the underlying assets' price increase, which will be reflected in their shares.
Rounding out the top ten was PowerShares DB Agriculture Long (AGF), which though returning 31.72 percent, didn't have any complimentary ETFs to confirm a strong overall investing theme in that space.
There is no guarantee of course that the ETF themes that have worked for the first half of the year will continue; however, these three themes have strong factors driving them and should at least be on the radar on any investor going into the second half of 2014.
Brian Lund's blog offers more on personal finance, the stock market, investing and the secret to eternal life.