The process of narrowing down the best exchange-traded funds for 2018 to just a few picks can be challenging, to say the least, but picking just one ETF to dominate the year is much more difficult (and potentially dangerous).
Smart investors will have a diversified portfolio of funds that will consist of what some investment advisers label as a core and satellite structure, which is just as it sounds — one or two core holdings that will receive the highest allocation in the portfolio and a handful of satellite holdings to complete a diverse mix.
So, a solid portfolio of ETFs would likely include a broad market S&P 500 index fund, such as iShares Core S&P 500 ETF (NYSEARCA:IVV) and iShares Core U.S. Aggregate Bond ETF (NYSEARCA:AGG), along with funds from other diverse categories, such as small-cap stock, international stock and a few choice sector funds.
In this core and satellite structure, the core holdings are solid long-term holdings, whereas the satellites are higher in relative market risk, which will make them either the best or worst performers in your portfolio during any given year.
For this reason, the best ETFs in 2018 will likely be sector bets that concentrate holdings on one market segment.
The energy sector was a big laggard in 2017 but it stands a good shot at being a leader in 2018, which makes the Energy Select Sector SPDR (NYSEARCA:XLE) one of the best ETFs to hold during the year. Its expense ratio is a low 0.14%, or $14 for every $10,000 invested.
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.
Here’s how XLE can be the best ETF for 2018:
- Prices for energy stocks hit two-year lows in 2017 but now appear to be in full recovery mode.
- OPEC’s recent decision to maintain production cuts means oil supplies will remain on the low side, while demand looks positive for 2018.
- Should unforeseen circumstances bring downward pressure on energy stocks, XLE is full of large-cap names that can maintain better price stability than the riskier small- and mid-cap energy stocks.
In summary, XLE has a strong combination of contrarian bet and momentum play that often makes for the best ETFs during a calendar year.
Just remember that sector funds like XLE can be wisely used as satellite holdings in a diversified portfolio of funds.
As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities. However, he holds XLE, IVV, and AGG in some client accounts. Under no circumstances does this information represent a recommendation to buy or sell securities.