China casts a pall over global markets in third quarter

Global markets took it on the chin in the third quarter, with fears of slowing global growth, Federal Reserve tightening measures, slumping commodity prices and drug-pricing issues sending the major indexes down during the quarter more than 10% from their recent market highs. Of course, the primary catalyst for the market free-fall during the quarter was China, where the Shanghai Price Only Composite declined 30.38% for the quarter after a slew of poor economic reports showed the growth trajectory for the world's second-largest economy was on a decline, putting investors in a funk. A positive finish for equities in the last two trading days of September wasn't enough to offset the Fed-induced market rout. The Sept. 17 Federal Open Market Committee statement that kept interest rates unchanged sent many of the major indexes to their worst quarterly performance since at least Q3 2011 as market pundits began to question the health of the U.S. economy. The Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite all suffered negative returns for Q3, losing 7.58%, 6.94%, and 7.35%, respectively. The average equity exchange-traded fund fared somewhat worse for Q3 (-10.91%), suffering downside performance for the first quarter in four.

Equity ETFs with the largest Q3 inflows

After learning about an absurd increase in the price of a drug that treats parasitic infections, presidential hopeful Hillary Clinton announced plans to attack price gouging by pharmaceutical and health care firms, giving investors fodder for taking some of their hard-won profits off the table and sending biotech issues to their worst weekly losses in seven years. ETF investors injected $13.9 billion into equity ETFs in Q3, while also being net purchasers of taxable fixed-income ETFs ($19.6 billion) and municipal debt ETFs ($0.6 billion). As a result of global uncertainties, for the first quarter in three, investors were net redeemers of nondomestic equity ETFs, withdrawing $1.2 billion from the subgroup, while being net purchasers of domestic equity ETFs ($15.1 billion). As might be expected given the flight to safety, SPDR S&P 500 ETF Trust ($9.7 billion) was the biggest attractor of ETF investors' assets for the quarter. Emerging-markets ETFs — handing back $9.8 billion for Q3 — witnessed the largest net redemptions of Lipper's macro groups, bettered substantially by sector equity ETFs (-$2.5 billion).

Equity ETFs ranked by quarterly returns

Whether investors felt the Fed was signaling a lack of confidence in the economy or they realized the large declines in commodity prices would hurt our trading partners overseas, the pall hovering over the global markets became more pronounced, despite Fed Chairwoman Janet Yellen's comments that indicated the “prospects for the U.S. economy generally appear solid.” In a flight to safety and on late Q3 bottom shopping, investors pushed three equity classifications into the black for Q3: utility ETFs (2.06%), alternative equity market-neutral ETFs (1.94%) and real estate ETFs (0.77%).

Equity ETFs with the largest Q3 outflows

Two of the five top individual equity ETF performers were housed in the specialty/miscellaneous ETFs classification: ProShares VIX Short-Term Futures ETF (VIXY) (Q2's laggard) posted the best quarterly return of the universe (27.74%), followed by ProShares VIX Mid-Term Futures ETF (VIXM) (16.18%). Two alternative equity market-neutral ETFs took the third and fourth positions, with QuantShares US Market Neutral Momentum Fund (MOM) (9.94%) slightly outpacing QuantShares US Market Neutral Anti-Beta Fund (BTAL) (9.50%). Rounding out the top-five list was iShares Residential Real Estate Capped ETF (REZ) (housed in Lipper's real estate ETFs classification), returning 6.57%.

Newly-launched equity ETFs ranked by average daily volume

As a result of the Chinese market meltdown, the anticipated Fed interest rate hikes and related declines in commodity prices (particularly oil), the emerging-markets ETFs (-18.20), world sector equity ETFs (-13.77%) and commodity ETFs (-11.99%) macro groups were pummeled during the quarter.

One-year anniversary equity ETFs ranked by Q3 average daily volume

As of Sept. 30. Excludes leveraged and inverse funds, and exchange traded notes. *Most recently reported net prospectus expense ratio. N/A = Not available Source for all data: Lipper, a Thomson Reuters company

Precious metals equity ETFs (-25.12%), energy MLP ETFs (-24.46%) and natural resources ETFs (-23.06%) posted the lowest quarterly returns among the equity ETF classifications. Four of the five worst-performing individual ETFs were invested in commodity-related issues. Tom Roseen is head of Research Services at Lipper.