This year’s best-performing exchange-traded funds are an eclectic group.
They center on three red-hot themes: China, cannabis and genomics, a branch of biotechnology that uses DNA to try to treat or eliminate diseases like cancer. Largely, these groups underperformed last year but are making a rapid comeback.
The top five best-performing ETFs in 2019 are:
- The VanEck Vectors ChinaAMC SME-ChiNext ETF, up nearly 44 percent for the year;
- The marijuana-themed ETFMG Alternative Harvest ETF, also up nearly 44 percent;
- The Xtrackers Harvest CSI 500 China A-Shares Small Cap ETF, also with an almost 44 percent gain;
- The biotech-based ARK Genomic Revolution Multi-Sector ETF, up around 43 percent;
- And the Reality Shares Nasdaq NexGen Economy China ETF, up over 41 percent.
Here’s what experts think of these markets and the ETFs within them:
Investing in China wasn’t always this appealing. 2018 was a remarkably bad year for Chinese equities, with the benchmark Shanghai stock exchange declining 25 percent.
Now, things seem to be improving. The exchange hit a 52-week high on Monday and is now one of the world’s top-performing indexes, up more than 30 percent this year.
And when it comes to the ETF space, experts see opportunity to seize on the shift.
“Obviously, it’s becoming a bigger part of the global economy, so you should own more of it,” John Davi, founder and chief investment officer of Astoria Portfolio Advisors, told CNBC’s “ETF Edge” on Monday.
“My vantage point is that China trades at, like, 12 times earnings. S&P  is, like, 17 times earnings,” he said. “And if you look at earnings growth, you’ve got triple the amount of earnings growth for [the iShares MSCI China ETF, or MCHI] compared to the S&P 500. So risk-reward, you’ve got a margin of safety when you’re buying China. So it’s our biggest overweight in our portfolios. We like emerging markets.”
Still, even with the “valuation discount,” China’s economic stimulus plans and lower interest rates, it’s not safe to get too bullish on China just yet, CFRA’s Todd Rosenbluth said in the same interview.
Rosenbluth, CFRA’s director of ETF and mutual fund research, said the macroeconomic picture is still “a large part” of investing in China, especially with the U.S.-China trade dispute still unresolved.
“You can … go against that and use more single-country-oriented ETFs from iShares, or from Franklin, or from other providers that are out there, to underweight China in the portfolio,” he said.
Investing in cannabis was more of an open question for Davi and Rosenbluth.
Davi compared the recent boom in marijuana stocks to the dot-com bubble of the late 1990s, when a slew of internet stocks went public to lofty valuations before many of them proved to be unprofitable and collapsed.
“They said this back in the late ’90s with the internet stocks. They were going to revolutionize the way we lived our lives and technology was going to revolutionize the world,” Davi said. “Five made it, and the thousand that IPO’d didn’t. So you have to be careful.”
“[Cannabis is] not legal here in the United States on a federal level, and then there’s a handful of states where it is, so you are investing in Canadian stocks — that’s important — and you’re investing in a thematic approach to it,” he said.
But like with China, “these are some of the areas that underperformed significantly in 2018,” Rosenbluth said, which highlights an important part of ETF investing: “You can’t just look backward.”
When it comes to genomics, which is represented in 2019’s top five ETFs by the ARK Genomic Revolution Multi-Sector ETF, much of the group’s potential is “still to be determined,” Rosenbluth said.
“The good thing is this is an actively managed product,” he said. “That’s the good or the bad aspect of it. And so there’s only so many places that ARK can go within this overall theme, but they can pare back if they’re concerned about the prospects of individual companies as opposed to a traditional index-based product that has to stay fully invested in that theme.”