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“Everyone has the brainpower to make money in stocks, but not everyone has the stomach,” famed money manager Peter Lynch once quipped. And choppy markets during the first quarter of 2018 made some stomachs queasy.
After hitting a peak near 250%, the Cboe Volatility Index (VIX) settled down but still traded much of the first quarter in the plus-100% range. The spike contributed to massive losses for traders of exchange-traded products who bet that financial markets would remain calm. The VelocityShares Daily Inverse VIX Short-Term ETN (XIV) crashed 93% in early February, wiping out a five-year 500% gain. XIV was forced into liquidation by Credit Suisse, a stunning reversal for a product that had more than $2 billion in assets in late January.
The iShares Gold Trust (IAU), a classic defensive asset, had a quarterly gain of nearly 3% that easily beat both U.S. stocks and bonds. Other defensive plays, such as the Direxion Daily S&P 500 Bear 1X Shares ETF (SPDN), which aims for 100% daily opposite exposure to the S&P 500, also delivered respectable quarterly returns.
Another trend is higher U.S. interest rates. The yield on 10-year U.S. Treasurys jumped about 17%, pushing down the performance of popular bond ETFs like the Vanguard Total Bond Market ETF (BND) and the iShares 20+ Year Treasury Bond ETF (TLT).
Despite jittery stock prices, corporate earnings are strong. During the first quarter, 73% of S&P 500 companies reported earnings per share above analysts’ estimates, pushing the S&P’s earnings growth rate to almost 15%. Additionally, expectations are high for better wages and increased dividend payouts as a result of corporate tax reductions.
Globally, emerging-market stocks continued to outperform developed-market stocks. Southeast Asia has remained hot, and strong returns are coming from single-country funds like the iShares MSCI Malaysia ETF (EWM), iShares MSCI Taiwan ETF (EWT) and the iShares MSCI Thailand ETF (THD).
The market for new ETPs was brisk, with a total of 72 newly issued products. That total doubled the output of the same quarter the year before. Looking ahead, Wall Street is eyeing the securitization of cryptocurrencies. While regulatory hurdles abound, any such approvals would open up the floodgates for new ETPs.