3 Good ETFs Having a Great Year

As we enter bear-market territory for the first time in over a decade, the goal posts have moved for what it takes for a fund to have a great first half of the year. The three ETFs highlighted today don’t tout impressive returns year-to-date, but they have outperformed their Morningstar Category peers, which really means their great year has simply been less bad than others.

Let’s turn to the first fund on my list: the WisdomTree US High Dividend ETF, or DHS. This dividend ETF tries to strike a balance between dividend income and the risks inherent in dividend investing. The fund targets the top 30% highest-yield stocks in the U.S. while excluding stocks with deteriorating fundamentals and price.

Unlike most funds, WisdomTree doesn’t constrain the fund’s weights to benchmark a parent index, instead opting to weight securities by yield and tilting toward lower-risk companies. This results in significant active style and sector bets versus the rest of the U.S. large-value category—bets that come at the expense of diversification. In 2022, the bets have paid off, led by a hefty allocation to energy companies.

While these bets don’t always pay off, we think the fund wins often enough to carve out an advantage over the Russell 1000 Value Index, its category index, over the long run. Fair warning: DHS’ high degree of active risk ensures differentiated returns from the market. Expect a bumpy ride.

The second fund on my list is Silver-rated iShares MSCI USA Minimum Volatility Factor ETF, or USMV. This defensive fund is battle-tested, and its relative success in 2022 should come as no surprise. Its portfolio favors stocks that exhibit low volatility; however, it earns its keep by optimizing for volatility at the portfolio level rather than the security level. This means that USMV may include a more volatile company in its portfolio if it has a low or negative correlation to other holdings.

Unlike our first fund, USMV’s index also includes a series of constraints meant to control for active factor and style bets to improve diversification. This ensures USMV is an all-weather defensive fund and one that has handily outperformed many of its U.S. large-blend peers year-to-date.

The third and last fund on my list is Silver-rated iShares S&P MidCap 400 Growth ETF, IJK. Growth stocks have been pummeled in the first half of 2022, making this an unlikely choice for this list. But the profitability screen used by the fund’s underlying index has proved to be a game changer in 2022.

S&P 1500 indexes—such as IJK’s parent index, the S&P MidCap 400 Index—require all constituents be profitable over the past four quarters, as well as the most recent quarter, to be eligible for inclusion in the index. Not all of the companies still check that box long after their inclusion, but the initial requirement shields this fund from many of the risker, more-speculative names that are commonplace in the mid-cap growth market. This tamps down volatility and should aid performance during downtrends.

The profitability screen becomes particularly differentiating in mid-cap and small-cap growth categories where nonprofitable companies abound. IJK’s portfolio differs substantially from other mid-cap growth ETFs. It tends to trade at cheaper valuations than peers, overweighting cheaper sectors like real estate and utilities at the expense of pricier unprofitable tech stocks.

While the profitability screen can make S&P index funds late to the party, like the S&P 500 famously was for Tesla TSLA, the end portfolio should be far more resilient during bear markets than competitors’. This has been the case in 2022, as IJK has soundly beat the U.S. mid-cap growth category average by several percentage points.