After peaking in the first month of the year, Wall Street was caught in a vicious circle of volatility that stemmed from inflationary expectations and trade war fears. In fact, the three major large cap indices slipped into the correction territory in February. However, two of these have recouped the losses since then.
The Nasdaq Composite has been the outperformer in the first six months of 2018, gaining more than 9% while the S&P 500 rose 1.7%. Dow Jones logged in the worst first half performance since 2010, losing 2%. Small cap stocks, as indicated by the Russell 2000, turned out to be investors’ darling and climbed up 7%.
The tension between the United States and some of its major trading partners has shaken the market in the past four months and is likely to do so going ahead in the second half. This is because the tit-for-tat tariff situation has turned hostile with the world’s largest countries announcing tariffs on billions of dollars’ worth of imports that are likely to take effect Jul 6. Additionally, the Trump administration imposed tariffs on steel and aluminum imported from the European Union, Canada and Mexico in June, and each retaliated with their own tariffs on American goods.
However, strong corporate profits, accelerating economic growth, Trump’s tax cuts and higher oil price continued to support the stocks.
In such a scenario, we have highlighted four sector ETFs that have outperformed the market in the first half and could be better plays in the months ahead should the trends prevail.
Sector ETFs That Beat the Market in 1H: Invesco S&P SmallCap Health Care ETF (PSCH)
The Invesco S&P SmallCap Health Care ETF (NASDAQ:PSCH) got a boost from the dual tailwinds of its sector’s non-cyclical nature and its small-cap focus. Small-cap stocks are well insulated from headwinds as we are currently seeing including trade war fears, tariff concerns, and geopolitical tensions.
These stocks are considered safe and better plays if any political issue or economic turmoil creeps into the picture. Additionally, encouraging sector fundamentals, tax reform, rising M&A activities and positive regulatory backdrop added to the strength.
This fund provides exposure to the health care sector of the U.S. small cap segment by tracking the S&P SmallCap 600 Capped Health Care Index. Holding 72 securities in its basket, the fund is widely diversified across components with each holding less than 4.5% share. From an industrial look, healthcare equipment & supplies, and healthcare providers & services take the top two spots at more than 27% share each followed by biotechnology with 22.3% allocation.
The product has amassed $756.5 million in its asset base and trades in a moderate average daily volume of around 57,000 shares. It charges 29 bps a year from investors and has a Zacks ETF Rank #1(Strong Buy) with a High risk outlook.
Sector ETFs That Beat the Market in 1H: SPDR S&P Internet ETF (XWEB)
Despite the wild swings and trade war fears, the technology sector remained the hot spot for investors in the first half, given the dual tailwinds of a rising rate scenario and the new tax repatriation policy.
The emergence of cutting-edge technology such as cloud computing, big data, Internet of Things, wearables, VR headsets, drones, virtual reality, and artificial intelligence (AI) as well as strong corporate earnings are acting as the key catalysts.
The SPDR S&P Internet ETF (NYSEARCA:XWEB) targets the Internet corner of the broad tech space. It tracks the S&P Internet Select Industry Index and holds 71 stocks in its basket with an equal-weight exposure of around 2%.
The fund has accumulated $35.1 million in its asset base and charges 35 bps in fees from investors. It trades in a light volume of under 6,000 shares a day on average and carries a Zacks ETF Rank #3 (Hold).
Sector ETFs That Beat the Market in 1H: Amplify Online Retail ETF (IBUY)
The retail sector has been gaining on growing consumer spending, tightening labor market, rising wages and record consumer confidence. A massive $1.5-trillion tax cut is also providing consumers with extra cash that is leading to higher discretionary spending.
While all retail ETFs are surging, Amplify Online Retail ETF (NASDAQ:IBUY) got additional boost from the growing demand for online shopping.
IBUY offers global exposure to companies that derive 70% or more revenues from online and virtual retail by tracking the EQM Online Retail Index. The fund comprises 39 stocks that are widely diversified, with each holding not more than 5% of the assets.
It has attracted $455.2 million in its asset base and charges 65 bps in fees per year. The product trades in a good volume of 108,000 shares a day.
Sector ETFs That Beat the Market in 1H: Invesco Dynamic Energy Exploration & Production ETF (PXE)
Energy sector has been on a tear on rising oil prices. U.S. crude oil gained more than 20% in first half of 2018 buoyed by soaring demand, reducing supplies from Venezuela, Libya and Canada, threats of supply disruption from Iran as a result of sanctions, and of course the historic output cut deal between the OPEC, Russia and other producers.
Last month, the OPEC members committed to cut no more than 1.2 million barrels per day that was set in November 2016. The move could result in a nominal output rise of around 1 million barrels per day, or 1% of global supply, per the top producer Saudi Arabia.
Invesco Dynamic Energy Exploration & Production ETF (NYSEARCA:PXE) follows the Dynamic Energy Exploration & Production Intellidex Index, which thoroughly evaluates companies based on a variety of investment merit criteria, including price momentum, earnings momentum, quality, management action and value.
Holding 30 stocks in its basket, the fund is well spread across components with none accounting for more than 5.1% of the assets. It is relatively unpopular with AUM of $98.7 million and lower average daily volume of 31,000 shares. Expense ratio comes in at 0.80%. The fund has a Zacks ETF Rank #3 with a Medium risk outlook.
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