Stock markets around the world were off to a strong start in the third quarter thanks to the market reversal recorded in the second quarter of 2020. Economies worldwide continued to reopen, and the hope of a coronavirus vaccine and stimulus from central banks buoyed returns.

U.S. gross domestic product (GDP) is expected to rebound in the third quarter from its –31.4% annualized decline in the second quarter. Broad economic data continued to improve throughout the three-month period, despite a slight pullback in U.S. equities in September.

The table below shows data for the best and worst exchange-traded funds (ETFs) matching the criteria for inclusion in this quarterly update.

Clean Energy Sector ETFs on Top

Sector ETFs accounted for four of the top five performers for the third quarter. Leading all ETFs were three funds focused on clean energy indexes: First Trust NASDAQ Clean Edge Green Energy ETF (QCLN), iShares Global Clean Energy ETF (ICLN) and VanEck Vectors Low Carbon Energy ETF (SMOG), with returns of 49.1%, 48.0% and 34.2%, respectively.

These funds follow indexes that track companies with exposure to manufacturing, development, distribution and installation of emerging clean-energy technologies. This includes clean electricity production from wind and solar sources and also companies investing in biofuels and electric vehicles, including the leading U.S. electric vehicle and autonomous driving developer, Tesla Inc. (TSLA), and Chinese competitor NIO Inc. (NIO). The potential for energy and economic reform under a Biden presidential administration has also furthered these markets.

These funds contrast with the bottom-performing funds—all five of which focus on the energy sector. The worst-performing ETF for the quarter was the iShares U.S. Oil & Gas Exploration & Production ETF (IEO) with a loss of 20.4%. Energy sector funds are the worst-performing funds over the last quarter, one- and five-year periods.

The other two top five sector funds track consumer cyclicals, benefiting from the strong U.S. homebuilding market. The iShares U.S. Home Construction ETF (ITB) recorded a gain of 28.2%, and the SPDR S&P Homebuilders ETF (XHB) rose by 22.9%. New home demand and home improvement stocks have been strong in 2020 due to the effects of the coronavirus pandemic.

International Winners Dominated by China

The only ETF among the five top-performing funds for the quarter not in the sector category belonged to the international category: Global X MSCI China Consumer Discretionary ETF (CHIQ) with a gain of 30.1%. The Chinese economy is on track to be the only major world economy to grow in 2020, according to the International Monetary Fund.

China recently reported third-quarter GDP expansion of 4.9% year over year, which moves it into positive territory year to date for 2020. ETFs focused on China are the top one-year performers as of September 30, 2020. The Global X MSCI China Consumer Discretionary ETF leads one-year returns as well, with a 70.8% increase.

Large-Cap Growth Leads Domestic ETFs

For U.S. equity ETFs, the third quarter marked a return to the lead for large-cap growth stocks. Four of the top five ETFs are in the large-cap growth category, led by the American Century Focused Dynamic Growth ETF (FDG) with a return of 18.1%. This ETF was launched at the end of the first quarter of 2020, and over one-third of its sector weighting is in information technology.

The large-cap growth category also led U.S. equity ETF returns for one- and five-year periods as of September 30. Invesco QQQ Trust (QQQ) led one-year returns with a 48.5% gain and five-year returns with a 23.4% annualized gain. It tracks the Nasdaq 100 nonfinancial index, which has a heavy technology sector weighting.

Large-cap value and small-cap blend ETFs made up the bottom-performers for the quarter. The Invesco S&P 500 Enhanced Value ETF (SPVU) lost 1.8% as a large-cap value fund and the Invesco S&P SmallCap Low Volatility ETF (XSLV) fell by 1.5% as a small-cap blend ETF.

About the Quarterly ETF Update

The Quarterly ETF Update highlights the best- and worst-performing exchange-traded funds. It provides 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. ▪