Welcome to the first Quarterly ETF Update. This column is based on our long-running Quarterly Mutual Fund Update (QMFU), found here.

The Quarterly ETF Update will highlight the best- and worst-performing exchange-traded funds. Its goal will be to provide an overview of the ETFs that are currently outperforming and those that are underperforming.

The ETFs covered are based on the same global asset classes and fund groups used for mutual funds: U.S. equity, sector equity, international equity and fixed income. All ETFs covered are required to have a minimum of $25 million in assets, a minimum trading volume of 5,000 shares per day and an expense ratio ranking in the bottom half of their respective categories. All return information is based on changes in net asset value (NAV) to allow for a more direct comparison with similar mutual funds.

A Tough First Quarter

Most exchange-traded funds incurred losses during the first three months of 2020. Out of the nearly 2,400 total ETFs in our database, just 69 realized a positive return. Most of these funds were in categories not covered in this column (e.g., alternative), are of smaller size or had above-average expense ratios.

The widespread losses explain why nearly all of the equity-focused ETFs shown in Table 1 were in the red last quarter. The coronavirus pandemic spread worldwide, leading to a global economic slowdown and instability in the financial markets.

Stay at Home a Winning Theme in Sector ETFs

The only two sector ETFs to realize positive returns last quarter both had ties to gaming: VanEck Vectors Video Gaming and eSports ETF (ESPO) and Global X Video Games & Esports ETF (HERO). The closing of schools and colleges along with shelter-in-place orders led investors to seek out companies that would benefit, such as those involved with video games and esports.

VanEck Vectors Video Gaming and eSports favors larger companies with a required minimum market capitalization of $150 million. Global X Video Games & Esports specifically does not exclude smaller companies, holds more stocks and has a higher expense ratio.

A Long-Term Bond ETF Soars as Yields Fall

PIMCO 25+ Year Zero Coupon US Treasury ETF (ZROZ) not only was the best-performing ETF in our quarterly update universe, it was also the best-performing non-leverage, long-only ETF in our entire database. As the name implies, PIMCO 25+ Year Zero Coupon holds long-term Treasury STRIPS (aka, zero-coupon bonds). STRIPS represent the principal portion of a bond, with the interest-bearing coupons “stripped” away. Because there are no interest payments attached, zero-coupon bonds are more sensitive to changes in interest rates than traditional bonds. This characteristic combined with the long-term maturity of PIMCO 25+ Year Zero Coupon’s investments can lead to large price changes when interest rates make a big move. Such was the case in the first quarter when Treasury yields fell to new record lows.

Large-Cap ETFs Lead Domestic ETFs

The tough market environment meant even top domestic stock ETFs for the first quarter incurred double-digit losses. The Invesco QQQ Trust (QQQ), which tracks the Nasdaq 100 index, fared the best—relatively speaking—with a loss of 10.3%.

Three of five best-performing domestic stock ETFs used alternative weighting methodologies. The WisdomTree 90/60 US Balanced ETF (NTSX) uses futures contracts to achieve what it describes as a 90% stock and 60% bond allocation. The VictoryShares U.S. EQ Income Enhanced Volatility Weighted ETF (CDC) tactically reduces its exposure to the stocks in an attempt to time the market. The Victory-Shares U.S. Discovery Enhanced Volatility Weighted ETF (CSF) weights holdings based on their six-month volatility.

Petroleum ETFs Run Dry

The three exchange-traded funds incurring the largest losses were all tied to the energy sector. iShares US Oil Equipment & Services ETF (IEZ) plunged by 70.1%, the VanEck Vectors Oil Services ETF (OIH) dropped by 69.7% and the UBS ETRACS Alerian MLP Infrastructure ETN (MLPI) fell by 59.1%.

The iShares US Oil Equipment & Services ETF and the VanEck Vectors Oil Services ETF both hold stocks providing equipment and services related to the exploration and extraction of oil. The first quarter’s drop in oil prices and increase in inventories was a toxic mix for oil producers companies.

Don’t Judge an ETF Solely By Its Name

Some of you may notice Global X SuperDividend ETF (SDIV) having the second-largest decline among international ETFs. While the inclusion of the word “dividend” in an ETF’s name may suggest a less volatile portfolio, the majority of Global X SuperDividend’s largest holdings are energy, iron and steel companies.