ETFs In 2011: Treasurys Soared; Solar Sunk

Eight of the top 10 best-performing ETFs in 2011 were focused on U.S. Treasurys—even after a historic downgrade of U.S. debt in August—an unlikely turn of events that must have surprised Pimco’s Bill Gross as much as it did gold bugs.

No. 1 on the list of 2011’s top performers was the Pimco 25-Year Zero Coupon U.S. Treasury ETF (NYSEArca:ZROZ - News), which returned 51.9 percent through Dec. 28. The No. 2 fund was the Vanguard Extended Duration Treasury ETF (NYSEArca:EDV - News), which rose 48.7 percent. Third on the list was iPath U.S. Treasury Bull ETN (NYSEArca:DTYL - News), which grew 44.4 percent.

With all of the uncertainty circling the globe, including turmoil in the Middle East, the unresolved eurozone debt crisis and the U.S. downgrade, one would think that investors would be making a beeline for precious metals, such as gold. But investors increasingly looked past the precious metal, which barely rose 8 percent in 2011, to take sanctuary in long-term U.S. debt.

Apart from precious metals, investors also steered clear of ETFs focused on alternative energy and the emerging markets. Solar-focused funds were among the worst investments this year. The honors for worst-in-class goes to the Market Vectors Solar Energy ETF (NYSEArca:KWT - News), which lost about two-thirds of its value in 2011.

Playing Defense

While Bill Gross bet the farm on shorting Treasurys in 2011, other investors apparently felt that the U.S. offered the safest bet in an uncertain world economy, and they piled into credits issued by Uncle Sam.

With investors braced for the worst, even the Nos. 9 and 10 most successful funds appeared to owe their position to fears about the future, rather than some conviction that the outlook was bullish. For example, the iShares Dow Jones U.S. Pharmaceuticals ETF (NYSEArca:IHE - News) returned 19 percent, in a classic example of a defensive play in an uncertain economy.

Similarly, the presence of the United States Brent Oil ETF (NYSEArca:BNO - News) as the No. 10 fund on the top returners list speaks more to growing concern about oil supplies at a time of upheaval in the Middle East and North Africa than a sense that a strong world economy was fueling demand for oil.

Solar Sunburn And Other Dogs Of 2011

Right behind the solar fund KWT, another solar-focused fund was in the No. 2 spot on the bottom-performers list. That’s TAN, the ETF with a cute ticker but an ugly return profile. It lost 66.4 percent of its value in 2011.

A different set of geopolitical factors explains decline of the Global X Uranium ETF (NYSEArca:URA - News), which earned the No. 3 position on the bottom-performers list. This ETF, which hemorrhaged 60.5 percent of its value, was undoubtedly affected by the near-meltdown of a nuclear power plant in Japan, as well as Germany’s announcement that it would be closing its older nuclear power plants and looking beyond nuclear power to fuel its future power needs.

Emerging markets, as noted, were another category that figured prominently among the poor performers of 2011.

This sector, which had been one of the investment darlings of 2010, was hit hard by crimped demand from developed nations in tandem with growing investor concern about civil unrest in the Middle East, which was roiled by a sometimes-bloody Arab Spring.

The Market Vectors India Small-Cap ETF (NYSEArca:SCIF - News), which was No. 6 on the bottom-performers list, lost almost 56 percent of its value, and the Market Vectors Egypt (NYSEArca:EGPT - News), No. 7 on the list, lost 53.3 percent of its value.

The poor performance of SCIF and EGPT was a conspicuous example of the broad-based declines of developing-market funds, such as the iShares MSCI Emerging Index Fund (NYSEArca:EEM - News), which lost 20.8 percent of its value, and the Vanguard Emerging Markets ETF (NYSEArca:VWO - News), which fell 21.1 percent.

End Of Precious Metals Bubble?

So what became of precious metals?

The equities-based First Trust ISE Global Platinum ETF (NYSEArca:PLTM - News) ended up losing half its value, earning it the No. 10 position on the bottom-performers list.

Platinum, which is used both in jewelry and in catalytic converters for automobiles, owes its decline to a slowing of the world economy, but, like gold, also appears to have lost its appeal, for now, as a hedge against financial uncertainty.

After a year where gold has seen double-digit rallies and double-digit sells-offs that caught some of the smartest hedge fund managers in the business such as John Paulson on the wrong side of the market, the ultimate hedge ended up with only modest gains. The SPDR Gold Shares (NYSEArca:GLD - News) physical bullion was up by only 7.5 percent.

Meanwhile, the Market Vectors Gold Miners ETF (NYSEArca:GDX - News) was down 18.2 percent. Either miners are an indication of where the bullion market is headed, or their stock is primed to soar to the point where they catch up and potentially start outperforming the physical gold market.

However, 2011 has been an extremely volatile year for many investments, and faith in the U.S. economy could easily wither if Washington approaches another political stalemate over the large and growing budget deficit.

In such a scenario, gold, which has been on one of the big roller coaster rides of any asset class over the past year, could come back as a safe haven.

One thing is for sure:2011 was a year that ended some long-running winning streaks, and confounded some of the brightest fund managers.

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