In the first half of 2018, the S&P 500 gained 2.5%. And now, the third quarter — historically a tricky time for domestic equities — is here. While July usually is not a bad month for stocks, August and September are generally two of the worst months of the year for the S&P 500.
That does not mean investors need to move out of stocks. Some market segments have the potential to not only surprise in the third quarter, but also beat the S&P 500. Exchange traded funds (ETFs) can help investors looking for upbeat third-quarter surprises across myriad asset classes and sectors.
When considering ETFs to buy for market-beating third-quartet performances, investors can evaluate multiple strategies. For instance, some ETFs to buy in the July through September period may include the first half’s laggards. Conversely, other ETFs to buy in the current quarter may consist of those funds that delivered impressive out-performance in the first six months of the year.
Here are five ETFs to buy to beat the S&P 500 over the next three months.
ETFs to Buy: iShares Russell 2000 Value ETF (IWN)
Expense ratio: 0.24% per year, or $24 on a $10,000 investment.
One of the most obvious and perhaps encouraging themes from the first half of 2018 was the substantial out-performance of small-cap stocks and ETFs over their large-cap counterparts. As of July 6th, the Russell 2000 Index is up 11% year-to-date compared to just 4.1% for the S&P 500, indicating small-cap funds could be among the ETFs to buy in the third quarter.
On July 9th, 25 small-cap ETFs hit all-time highs, including the iShares Russell 2000 Value ETF (NYSEARCA:IWN). As IWN illustrates, small-caps’ thumping of large-caps includes value stocks. IWN is higher by nearly 9% this year while the large-cap S&P 500 Value Index is lower by more than 1%. This ETF to buy tracks the Russell 2000 Value Index, which does reflect a value proposition relative to broader small-cap benchmarks. Earnings multiples for IWN components as a group are below those of the S&P 500 and well below those of the Russell 2000.
IWN holds approximately 1,370 stocks, over 28% of which hail from the financial services sector. The real estate and industrial sectors combine for about 23.6% of the fund’s weight.
ETFs to Buy: ALPS Medical Breakthroughs ETF (SBIO)
Expense ratio: 0.50% annually, or $50 on a $10,000 position.
The ALPS Medical Breakthroughs ETF (NYSEARCA:SBIO) has been highlighted on InvestorPlace several times this year and with good reason. As of July 6th, SBIO is up 18.5% year-to-date, more than double the returns offered by the large-cap Nasdaq Biotechnology Index.
For biotechnology investors, SBIO is one of the ETFs to buy for several reasons. The mid- and small-cap biotech space, SBIO’s playground, is packed with potential growth and potential peril. In other words, stock-picking in this arena is difficult, but SBIO’s basket approach eliminates the stock-picking burden.
SBIO is one of the healthcare ETFs to buy for other reasons, including its position as a beneficiary of positive Food & Drug Administration (FDA) approval news as well as being home to an extensive list of companies that could be viable takeover targets for larger biotech and pharmaceuticals suitors.
ETFs to Buy: Utilities Select Sector SPDR (XLU)
Expense Ratio: 0.13%, or $13 on a $10,000 stake.
Amid rising interest rates, the rate-sensitive utilities sector was left for dead earlier this year. Through most of the first half of 2018, the Utilities Select Sector SPDR (NYSEARCA:XLU) and rival utilities ETFs slumped. That trend sharply reversed in June as utilities funds suddenly became ETFs to buy. Over the past month, XLU is higher by about 7%, a startling move in that time frame for a normally slow-moving fund.
On a historical basis, XLU is among the ETFs to buy in Q3 because the fund generally performs less poorly than other sector offerings in August and September. Since 1999, the first full year of trading for the sector SPDR ETFs, XLU is the second-best member of that group in August and September.
XLU, which yields 3.35%, could see its status as an ETF to buy bolstered by ongoing trade war concerns because the utilities sector derives most of its revenue on a domestic basis.
ETFs to Buy: Invesco S&P 500 Momentum ETF (SPMO)
Expense ratio: 0.13% per year, or $13 on a $10,000 investment.
Thanks in large part to the FAANG stocks and some other related fare, the momentum factor is again delivering for investors this year. The Invesco S&P 500 Momentum ETF (NYSEARCA:SPMO) is not as large as some rival momentum funds, but it is this year’s best-performing momentum ETF with a gain of over 10%.
SPMO is one of the ETFs to buy for investors looking for umbrella exposure to the technology and consumer discretionary sectors as those sectors are cornerstones of traditional momentum strategies. The Invesco ETF dedicates about 57% of its combined weight to those sectors. Four of the five FAANG stocks — Apple Inc. (NASDAQ:AAPL) excepted — combine for 23% of SPMO’s weight.
SPMO tracks the S&P 500 Momentum Index, which consists of 98 S&P 500 members deemed to be high momentum fare.
ETFs to Buy: SPDR S&P Internet ETF (XWEB)
Expense ratio: 0.35% per year, or $35 on a $10,000 stake.
Keeping with the momentum theme, the SPDR S&P Internet ETF (NYSEARCA:XWEB) is an ETF to buy in Q3. Just 13 ETFs have year-to-date gains of 30% or more. Strip out the leveraged funds and that number dwindles, but XWEB is a member of the 30% club. That also means XWEB is this year’s best-performing Internet ETF.
While many market observers are crowing about the S&P 500’s 2018 upside being mostly attributable to a small number of stocks, including the FAANGs, XWEB’s performance is all the more impressive when noting this is an equal weight fund. None of XWEB’s holdings exceed weights of 1.90% and Netflix (NASDAQ:NFLX) is the only FAANG member of among this fund’s top 10 holdings.
The weighted average market value of XWEB’s 71 holdings is $41.53 billion. That compares with a mean market cap of $65.81 billion on the Dow Jones Internet Composite Index.
Todd Shriber does not own any of the aforementioned securities.
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