The best exchange-traded funds (ETFs) to finish 2017 will likely be the funds that focus on sectors that can benefit from current and emerging market trends and economic conditions.
With that said, smart investors won’t place all of their bets on just one or two sectors; it’s wise to balance strategy with diversification, which means the best way to play the rest of 2017 will be to allocate assets to a handful of sector ETFs, in addition to existing core holdings.
Economic trends that will likely affect capital markets in the near-term and beyond include rising interest rates, geopolitical uncertainty, above-average retail holiday sales and a battle between risk-off and risk-off modes.
So, with that in mind, and in no particular order, we highlight 10 of the best sector ETFs to consider holding in your portfolio through the end of 2017:
Best Sector ETFs for the Rest of 2017: Financial Select Sector SPDR (XLF)
Expenses: 0.14% or $14 annually for every $10,000 invested
The interest rate environment is ripe for financial sector ETFs in 2017 and in 2018, which makes now a good time to hold funds like the Financial Select Sector SPDR Fund (NYSEARCA:XLF).
Rising interest rates means wider spreads for financial institutions that lend money and a healthy stock market means big business for brokerage firms and financial conglomerates involved in capital markets.
XLF, the oldest financial sector ETF, tracks the Financial Select Sector Index, which focuses primarily on large U.S. stocks like Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B), JPMorgan Chase & Co. (NYSE:JPM), and Bank of America Corp (NYSE:BAC).
Best Sector ETFs for the Rest of 2017: iShares TIPS Bond (TIP)
Now can be a good time to buy funds that hold Treasury Inflation-Protected Securities (TIPS) and iShares Barclays TIPS Bond Fund (ETF) (NYSEARCA:TIP).
TIPS funds do best when inflation is relatively low but expected to rise during the holding period. Inflation, for the foreseeable future, is expected to remain in a range between 2.0 and 2.5%; however the average historical rate is around 3%. Therefore, the potential for inflation to exceed expectations makes now a good time to hold ETFs like TIP.
In addition, although TIP could be one of the best bond ETFs to hold in 2017; TIPS funds can be smart long-term holdings.
Best Sector ETFs for the Rest of 2017: iShares US Aerospace and Defense (ITA)
Geopolitical uncertainty, especially rising from the US saber rattling with North Korea, will likely benefit defense sector ETFs like iShares US Aerospace and Defense (BATS:ITA) for the rest of 2017 and possibly beyond.
ITA is a good way for investors to gain exposure to U.S. stocks of companies that manufacture commercial and military aircraft and equipment used for defense.
The defense sector is crushing the S&P 500 in 2017 and this trend looks to continue in the near-term. ITA holds big aerospace and defense stocks like Boeing Co (NYSE:BA), United Technologies Corporation (NYSE:UTX) and Lockheed Martin Corporation (NYSE:LMT).
Best Sector ETFs for the Rest of 2017: SPDR Gold Trust (ETF) (GLD)
Inflation expectations and rising uncertainty in the world and in capital markets has made gold ETFs like SPDR Gold Trust (ETF) (NYSEARCA:GLD) smart holdings in 2017.
GLD is the best way for most investors to gain access to gold as a relatively liquid investment without physically holding it as an asset.
Buying gold ETFs can be a smart means to diversify a portfolio for investing in either the short-term or for the long run. Two of the primary factors that can push the price of gold higher are rising inflation and uncertainty over market conditions, both of which look to be in play in the near-term, making this one of the best ETFs to buy for the rest of 2017.
Best Sector ETFs for the Rest of 2017: Vanguard Consumer Discretionary ETF (VCR)
Forecasts for retail sales during the holiday season of 2017 look mostly positive, which means ETFs like the Vanguard Consumer Discretionary ETF (NYSEARCA:VCR) would be a primary beneficiary of a Santa Claus rally.
VCR tracks the performance of the MSCI US Investable Market Consumer Discretionary 25/50 Index, which covers about 375 stocks in the consumer discretionary, or consumer cyclical, sector.
Best Sector ETFs for the Rest of 2017: Technology Select Sector SPDR Fund (XLK)
Although tech stocks recently saw a setback in prices, sector ETFs like Technology Select Sector SPDR Fund (NYSEARCA:XLK) look to regain momentum and finish 2017 strong.
Although volatility could come into play in the near-term, technology sector ETFs like XLK could carry their tremendous momentum into 2018.
Best Sector ETFs for the Rest of 2017: Health Care SPDR (ETF) (XLV)
Health sector ETFs had a negative year in 2016 but are market leaders in 2017, which makes now a good time to hold funds like Health Care SPDR (ETF) (NYSEARCA:XLV).
Healthcare stocks like XLV top holdings Johnson & Johnson (NYSE:JNJ), Pfizer Inc. (NYSE:PFE) and UnitedHealth Group Inc (NYSE:UNH) can make solid long-term holdings. The momentum in 2017 can also make health sector ETFs a good idea in the short-term.
XLV has a good balance of health sector stocks, without too much concentration in the volatile bio-tech sub-sector. This makes XLV a fine choice for a diversification tool in a portfolio and it can also work as a defensive play.
Best Sector ETFs for the Rest of 2017: iShares Nasdaq Biotechnology (IBB)
Investors willing to take more risk in health stocks for greater potential return in 2017 may consider holding shares of a top biotech ETF like iShares Nasdaq Biotechnology Index (ETF) (NYSEARCA:IBB).
The biggest biotechnology ETF in the investment universe, IBB is a low-cost way of gaining concentrated exposure to biotech and pharmaceutical companies listed on the NASDAQ.
The health sector is a market leader in 2017 and the big gains have been largely driven by stocks like IBB top holdings Amgen, Inc. (NASDAQ:AMGN), Celgene Corporation (NASDAQ:CELG) and Gilead Sciences, Inc. (NASDAQ:GILD).
Best Sector ETFs for the Rest of 2017: Vanguard FTSE Emerging Markets (VWO)
Emerging markets stocks have been a strong “risk-on” play during 2017 and Vanguard FTSE Emerging Markets (NYSEARCA:VWO) is a smart way to benefit from this trend.
A big trend in 2017 is that the riskier sectors and fund types, such as technology, biotech, and emerging markets, are leading the market with only a few minor setbacks, which become buy-on-the-dip opportunities.
Should the risk-on play continue to reward investors in 2017, emerging markets stocks like VWO top holdings Tencent Holdings Ltd (OTCMKTS:TCTZF), Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM) and Naspers Limited (ADR) (OTCMKTS:NAPRF) should finish the year on a strong note.
Best Sector ETFs for the Rest of 2017: iShares Global Materials (MXI)
Basic materials and natural resources have outperformed the broad market indices in 2017, especially in the third quarter, and this momentum bodes well in Q4 for sector ETFs like iShares Global Materials (NYSEARCA:MXI).
MXI tracks an index consisting of global stocks in the basic materials sector, which includes companies involved in the production of chemicals, metals and mining, and oil, gas and consumable fuels.
As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities. However, he holds GLD, XLK, and XLV in some client accounts. Under no circumstances does this information represent a recommendation to buy or sell securities.