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Best & Worst ETF Areas of Q3

The third-quarter was an average-to-downbeat period for investors, mainly due to rising rates. A cooling U.S. economy, falling consumer confidence, real estate crisis in China, a series of bank downgrades also made matters worse for Wall Street. However, all were not downbeat for the broader market as there were ebbing U.S. recession fears along with several upbeat economic data points and a decent Q2 earnings season.

The S&P 500 (down 0.7%), the Nasdaq (down 2.1%) and the Russell 2000 (down 2.5%) have slumped in the third quarter while the Dow Jones (up 0.7%) gained (as of Sep 22, 2023).

Against this backdrop, let’s discuss the ETF areas that emerged winners in the third quarter and those that were hit hard (read: Top and Flop Industry ETFs of Q3).

Top ETF Areas

MLP – Credit Suisse S&P MLP Index ETN (MLP) – Up 47.98%

In the face of stock market fluctuations, this often-ignored sector has displayed considerable progress. Compared to other options in the larger energy sector, MLPs offer more stable cash flows, which reduces their risk. They stand out as an appealing investment choice for those looking for regular income, given that MLPs distribute nearly all their earnings to their investors frequently. Coupled with the prospects of capital growth, MLPs also exhibit reduced volatility and add diversification value to an investment portfolio.

Cannabis – Roundhill Cannabis ETF (WEED) – Up 40.51%

In a significant development, the Department of Health and Human Services (HHS) has recently initiated a review of marijuana's classification under the Controlled Substances Act. This move has the potential to impact the burgeoning marijuana industry favorably, which has faced federal restrictions despite state-level legalization efforts.

Since the 1970s, marijuana has been categorized as a Schedule I drug, alongside substances like heroin and LSD. The Drug Enforcement Agency (DEA) will consider reclassifying marijuana as a Schedule III drug, placing it alongside substances like ketamine, anabolic steroids, and testosterone. This change-over would be greatly beneficial for the pot companies (read: Behind the Recent Surge in Marijuana ETFs).

Interest-Rate Hedged – Simplify Interest Rate Hedge ETF (PFIX) – Up 36%

Fed Chair Jerome Powell emphasized the need for continued vigilance in the battle against inflation in Q3. Powell emphasized that even though inflation has moderated slightly from its peak, it is still at an undesirable level. This has led to further rate hikes or high-for-longer interest rates. Hence, the fund PFIX, which looks to hedge interest rate movements arising from rising long-term interest rates, and to benefit from market stress when fixed income volatility increases, won in the third quarter.

Flop ETF Areas

Euro zone –Franklin FTSE Eurozone ETF (FLEU) – Down 78.2%

The Euro zone economy has been struggling with higher rates, higher bond yields and slowing economic growth. Its largest economy Germany is in shambles. The Euro Area GDP expanded a meagre 0.1% sequentially in the second quarter of 2023, revised lower from initial estimates of a 0.3% gain. It followed a 0.1% growth in the previous quarter, revised higher from a flat reading. In Q2, Germany, which is the Euro Area largest economy stalled while Italy shrank 0.4%. Such lackluster economic growth picture probably has weighed on Euro zone ETFs.

Bitcoin Miners – Valkyrie Bitcoin Miners ETF (WGMI) – Down 25.3%

Bitcoin miners’ ETF WGMI, which invests in companies that derive at least 50% of their revenue or profits from bitcoin mining operations, underperformed in the third quarter as rising rate worries wreaked havoc on this high-tech space. Bitcoin prices have dived more than 12% so far in the third quarter. This explains why bitcoin miners ETF plunged in Q3.

Solar Power – Global X Solar ETF (RAYS) – Down 25.2%

There has been soft U.S. demand for solar equipment. The demand has been more lukewarm in states like Texas and Arizona where cheaper electricity prices have made the economics of residential solar less attractive. High borrowing costs have also been hurting solar companies’ businesses.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Franklin FTSE Eurozone ETF (FLEU): ETF Research Reports

Maui Land & Pineapple Company, Inc. (MLP): Free Stock Analysis Report

Simplify Interest Rate Hedge ETF (PFIX): ETF Research Reports

Global X Solar ETF (RAYS): ETF Research Reports

Valkyrie Bitcoin Miners ETF (WGMI): ETF Research Reports

Roundhill Cannabis ETF (WEED): ETF Research Reports

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Zacks Investment Research