The best exchange-traded funds to buy for 2018 will likely be funds that concentrate their holdings in sectors that can beat the broad market indices.
As is the case in almost every calendar year, some of the best ETFs in 2018 will be top funds in 2017 that continued their momentum into the New Year, while others will be recent laggards that make a big turnaround.
But picking the best ETFs for an entire year can be challenging, especially because there are always scenarios that play out that no one could have predicted accurately in advance.
Therefore, the smart bets for the top ETFs in 2018 will be a diverse list of funds that combine the best momentum plays based upon what we know now along with some contrarian bets that go against the herd consensus.
So, with that backdrop, here are the seven of the best sector funds that can lead the market in 2018:
Expenses: 0.15%, or $15 annually for every $10,000 invested
Momentum will be a major theme of 2018 and the best way to capture the trend is iShares Edge MSCI USA Momentum Factor (NYSEARCA:MTUM).
Although this ETF does not focus on one single sector, it’s a great way to gain exposure to momentum stocks that will inevitably come from the leading sectors, without having to identify them yourself.
MTUM offers shareholders exposure to momentum in the market by passively tracking the performance of an index of large- and mid-cap stocks with high relative momentum characteristics.
With rising interest rates and a resilient stock market, financial stocks should maintain leadership in 2018, which makes ETFs like the Financial Select Sector SPDR Fund (NYSEARCA:XLF) a smart fund to hold.
Higher rates generally translate into wider spreads for financial institutions that lend money, and a healthy stock market means higher profits for the big brokerage firms and other large financial companies involved in capital markets.
Although energy was a lagging sector for most of 2017, signs of life emerged toward the end of the year and this momentum has legs to move into 2018, which would benefit top energy ETFs like Energy Select Sector SPDR (NYSEARCA:XLE).
XLE tracks the Energy Select Sector Index, which consists of 25 stocks of companies in the oil and gas industries, as well as energy equipment and services.
Technology promises to continue as a market leader in 2018 and funds like PowerShares S&P SmallCap Information Technology (NYSEARCA:PSCT) could be smart bets in the tech sector.
In general, small-caps lagged large-caps in 2017, but that trend started to turn around in the fourth quarter, which could make PSCT a smart momentum growth bet for 2018.
PSCT passively tracks the S&P SmallCap 600 Capped Information Technology Index, which is an S&P SmallCap 600 subset that consists of small-cap stocks of companies that provide information technology-related products and services.
Health sector ETFs have taken a hit recently, but they have returned to market leadership, which makes 2018 a good time to consider holding funds like the Health Care SPDR (ETF) (NYSEARCA:XLV).
The health sector can work as a long-term growth play or a short- to intermediate-term defensive play, which makes health stocks like XLV top holdings Johnson & Johnson (NYSE:JNJ), Pfizer Inc. (NYSE:PFE) and UnitedHealth Group Inc (NYSE:UNH) a good idea to hold in almost any portfolio.
XLV has a good balance of health sector stocks, which means it won’t be as volatile as some of the health sector ETFs that are more concentrated in sub-sectors of health. This diversification can also serve as added insulation amid health legislation talks in Congress.
The utilities sector has quietly remained just behind the major market indices for performance in 2017 and it has recently picked up momentum. Combined with their defensive qualities, utilities ETFs look good for 2018.
The Vanguard Utilities ETF (NYSEARCA:VPU) passively tracks an index that consists of 75 quality U.S. utilities stocks like NextEra Energy Inc (NYSE:NEE), Duke Energy Corp (NYSE:DUK) and Southern Co (NYSE:SO).
The defensive nature of utilities will show its value once the stock market sees a major correction, which is overdue and a real possibility in 2018.
Diversification will likely be a major theme in 2018 and a smart move for that purpose is to hold a defensive stock ETF like the Consumer Staples Select Sect. SPDR (ETF) (NYSEARCA:XLP).
If stocks continue their climb, 2018 will see the nine-year anniversary for the bull market, which is getting old by historical standards. Therefore, now is arguably one of the best times in a decade to begin shifting portfolio holdings to a more defensive posture.
As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities. However, he holds XLE, XLV and XLP in some client accounts. Under no circumstances does this information represent a recommendation to buy or sell securities.