With the market roaring again to new all-time highs, it might be worth looking at the exchange-traded funds (ETFs) that sat atop the crowd last year to see if they might repeat that performance in 2018. I want to distinguish between the top performing ETFs and the top performing investments, however.
I’m covering the latter in this article, because the top performing ETFs were all leveraged ETFs — those highly risky vehicles that not only concentrate in one particular asset but also use debt or derivatives to amp up (or down) their returns.
Remember, just because a sector or security did really well one year does not mean it will repeat. Also, I’m going to exclude certain low-float securities, ETFs that have an asset base of less than $100 million, cryptocurrencies and things like securities involving volatility like the CBOE Volatility Index, because I want to stick to actual assets that trade based on fundamentals.
Top Performing ETFs to Watch
Emerging markets did exceptionally well both in general and on a country-specific basis. These markets include China, Brazil, Russia and India, as well as Southeast Asia. There were several factors that contributed to last year’s surge. For starters, the dollar’s strength improved. Because many of these countries hold debt in U.S. dollars, the weaker the dollar is, the less costly it is to pay off the debt.
Also, the fact that the Fed is not tightening monetary policy quiet as rapidly as expected has helped the debt situation in these countries.
In addition to low rates, there is low inflation and improving growth. China’s economic growth estimates have also increased.
The result of all this was more money being pushed into emerging market ETFs, which in turn has made them some of the best top performing ETFs to choose from.
There are several top performing ETFs to choose from in emerging markets, and it depends on how diversified you want to be.
The benchmark is the iShares MSCI Emerging Markets Indx (ETF) (NYSEARCA:EEM), which was up 34% last year. If you want to concentrate in the Asia Pacific region, check out the SPDR S&P Emerging Asia Pacific (ETF) (NYSEARCA:GMF), which was up 42% last year. This is a good way to expose yourself, if you desire, to those Chinese momentum stocks like Alibaba Group Holding Ltd (NYSE:BABA) and Baidu Inc (ADR) (NASDAQ:BIDU).
In addition to various emerging market ETFs, it’s a bit of a cheat to point out that the Technology Select Sector SPDR Fund (NYSEARCA:XLK) returned 36% last year. I consider this a cheat as far as top performing ETFs go because the FANG stocks account for more than a third of its asset base. Nevertheless, the market appears poised to continue in this uptrend, and that means this ETF should repeat.
Aerospace and Defense were also top performing ETFs last year and that should repeat in 2018. Although this sector is a kind of all-weather sector because of the limited number of companies involved in the space, and because even under dovish administrations like Obama’s, America still needs defense.
Now, however, President Trump has signaled a return to a more hawkish stance, and that bodes well for the sector being prominent in the list of top performing ETFs. Last year the PowerShares Aerospace & Defense (ETF) (NYSEARCA:PPA) returned 32%. However, iShares Dow Jones US Aerospace & Def.ETF (BATS:ITA) has a slightly better profile. Its expense ratio is 0.44% vs PPA’s 0.61%. It also has a slightly better average annual ten-year return of 12.1% +/- 38% vs PPA’s 10.4% +/- 36%.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He owns ITA. He has 23 years’ experience in the stock market, and has written more than 1,800 articles on investing. Lawrence Meyers can be reached at [email protected].