10 ETFs to Buy for a Rally

Investors looking to position for more upside may want to consider these ETFs

By Todd Shriber, InvestorPlace Contributor

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5 Small-Cap ETFs With Big-Time Upside Potential

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As of Sept. 5, the S&P 500 is up 8.3% year-to-date. The tech-heavy Nasdaq-100 Index is up more than double that, sporting a 2018 gain of 17.8%.

All of that is to say 2018 is proving to be another fine year for domestic equities and the related exchange-traded funds (ETFs). There are nearly 300 U.S.-listed exchange traded funds sporting year-to-date gains of 10% or more. Even when stripping out leveraged ETFs, which are designed to be short-term instruments, the universe of ETFs sporting double-digits year-to-date gains is well populated.

August, a historically tricky month for equities, saw investors pour $25 billion into ETFs, indicating appetite for the asset class remains robust.

Investors looking for exchange-traded funds with the potential to deliver more upside over the coming months may want to consider some of the following ETFs.

ETFs to Buy: Consumer Discretionary Select Sector SPDR (XLY)

Expense Ratio: 0.13% annually, or $13 per $10,000.

Amazon.com (NASDAQ:AMZN) recently joined the $1 trillion market value club, providing a lift to an array of cap-weighted consumer discretionary and retail ETFs. With a 25.4% weight to Amazon, the Consumer Discretionary Select Sector SPDR (NYSEARCA:XLY) makes for a more-than-adequate proxy on the e-commerce giant.

One of the criticisms of this year’s rally in domestic equities is that the FAANG stocks, including Amazon, are accounting for a disproportionate share of the broader market’s upside. The concern is valid … but the trend is not yet broken, so investors would do well to embrace it, not fight it. Thanks in large part to Amazon, consumer discretionary is the second-best sector this year, trailing only technology.

With little in the way of negative near-term catalysts for Amazon and the consumer discretionary entering its seasonally strong period, XLY should benefit if equities continue rising through year-end, making it an excellent ETF to buy.

ETFs to Buy: ALPS Medical Breakthroughs ETF (SBIO)

ETFs to Buy: ALPS Medical Breakthroughs ETF (SBIO)Expense Ratio: 0.5%

Investors looking for tactical exposure to the healthcare sector, the third-best group in the S&P 500 this year, should consider biotechnology ETFs, including the ALPS Medical Breakthroughs ETF (NYSEARCA:SBIO). SBIO is delivering for investors this year with a year-to-date gain of 14.6%.

Not only does SBIO invest in the sweet spot of the biotechnology space (mid- and small-cap companies), the ETF’s components must have at least one drug or therapy in Phase II or III clinical trials. That requirement positions investors for some potentially significant upside on positive trials while removing the need to stock pick among trial-stage companies.

“Stocks included in the Underlying Index must also sustain an average daily trading volume in excess of $1 million for the 90-day period preceding an Underlying Index reconstitution. Constituents must be able to sustain the monthly rates at which they use shareholder capital (‘cash burn rates’) for at least 24 months,” according to ALPS.

ETFs to Buy: Global X FinTech ETF (FINX)

ETFs to Buy: Global X FinTech ETF (FINX)Expense Ratio: 0.68%

The future of financial ETFs is here and it is here in the form of the Global X FinTech ETF (NASDAQ:FINX). While traditional financial services are lagging the broader market this year, FINX is acting like the growth play that it is with a year-to-date gain of 28.8%.

FINX, which turns two years old this month, provides broad-based exposure to the fintech ecosystem including insurance, investing, fundraising and lending companies, among others. Digital payments providers, such as Square (NYSE:SQ), are among the stocks driving FINX higher this year.

“Square’s success is indicative of how critical payments solutions have become to small and medium sized businesses,” according to Global X research. “From corner coffee shops to sophisticated ecommerce sites, it is table stakes for businesses to offer customers a variety of payments options that are safe and reliable. For all but the largest businesses, this service can be most efficiently provided by third party payments firms like Square, which in turn captures a percentage of the business’s total revenue.”

ETFs to Buy: Fidelity Momentum Factor ETF (FDMO)

ETFs to Buy: Fidelity Momentum Factor ETF (FDMO)
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Expense Ratio: 0.29%

As illustrated by the point that technology and consumer discretionary are top two sectors in the S&P 500 this year, the momentum factor is working and working well. The Fidelity Momentum Factor ETF (NYSEARCA:FDMO), which recently hit an all-time high, confirms as much.

FDMO tracks the Fidelity U.S. Momentum Factor Index, which follows domestic large- and mid-cap equities with favorable momentum traits. Typically, growth and momentum ETFs are dominated by technology and consumer cyclical stocks. Indeed, this Fidelity exchange-traded funds allocates over 39% of its combined weight to those sectors, but that is below the category average.

FDMO is up 12.3% year-to-date, putting the ETF comfortably ahead of the S&P 500. Investors looking for additional cost efficiencies can save some cash by trading FDMO with Fidelity on the firm’s commission-free ETF platform.

ETFs to Buy: BlueStar Israel Technology ETF (ITEQ)

ETFs to Buy: BlueStar Israel Technology ETF (ITEQ)
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Expense Ratio: 0.75%

On the surface, it looks like a lost year for international stocks as both the MSCI EAFE Index and the MSCI Emerging Markets Index are in the red. It depends on where an investor looks. The BlueStar Israel Technology ETF (NYSEARCA:ITEQ) is up 14.1% year-to-date, making it one of 2018’s best-performing developed markets single-country ETFs.

ITEQ is not the run-of-the-mill technology fund. This ETF offers exposure to exciting themes, including autonomous driving, artificial intelligence, cleanTech, defenseTech and 3D printing. All of those themes are compelling, but investors may want to consider ITEQ as an avenue to Israel’s booming fintech space.

“Over the last 18 months, 16 multinational financial firms started operating in the Israeli tech system, or increased their local footprint through strategic partnerships and investments, according to a new report by Start-Up Nation Central (SNC),” reports Calcalist.

ETFs to Buy: iShares Edge MSCI USA Value Factor ETF (VLUE)

Expense Ratio: 0.15%

Value stocks and the related exchange traded funds are scuffling this year, but the iShares Edge MSCI USA Value Factor ETF (BATS:VLUE) is showing some signs of life. VLUE, which tracks the MSCI USA Enhanced Value Index, has the added benefit of significant technology exposure, a trait not often found with value ETFs.

The fund allocates almost 27% of its weight to that sector, well above the category average. Value ETFs are often dominated by financials and energy stocks, two sectors that combine for less than 20% of VLUE’s weight. In the eyes of some market observers, value needs some tailwinds to confirm its resurgence. Robust economic growth could provide that spark.

“The catalyst most likely to revive value is the same one that drove out-performance during the back-half of 2016: an unexpected acceleration in economic growth, particularly nominal growth,” according to BlackRock.

ETFs to Buy: ProShares Equities for Rising Rates ETF (EQRR)

Expense Ratio: 0.35%

Interest rates have increased seven times, including twice this year, since late 2015. It is likely the Federal Reserve will hike rates again at its meeting this month and perhaps again in December. A slew of fixed-income ETFs help investors meet the challenges of rising rates in the bond space. The ProShares Equities for Rising Rates ETF (NASDAQ:EQRR) does so on the equity side.

EQRR currently allocates over 47% of its weight to the financial services and energy sectors, but the fund’s sector weights are dynamic. Translation: EQRR’s underlying index targets sectors with strong correlations to rising 10-year Treasury yields while targeting the stocks in those groups that have the tendency to rise as interest rates do the same.

Over long holding periods, investors should not expect EQRR’s sector weights to be the same as they are today because different sectors perform well during different rising rates environments. Examining EQRR on a broad level is encouraging. The ETF is nearly 14 months old, so it has been tested by a rate hikes in its brief lifespan. Over the past 12 months, EQRR is easily outpacing the S&P 500.

ETFs to Buy: iShares Micro-Cap ETF (IWC)

ETFs to Buy: iShares Micro-Cap ETF (IWC)Expense Ratio: 0.6%

Small-cap stocks and ETFs are impressing this year. Micro-cap fare has been even better. The iShares Micro-Cap ETF (NYSEARCA:IWC) is beating the Russell 2000 Index by about 150 basis points.

Making IWC’s outperformance of the small-cap benchmark all the more impressive is that the ETF has been only slightly more volatile than the Russell 2000 with valuations that are below those on small-cap stocks.

IWC holds over 1,400 stocks, so it can be an effective avenue for filling in some of the gaps created by traditional broad market funds that often ignore micro-cap equities. This ETF devotes about 48% of its weight to healthcare and financial services stocks.

ETFs to Buy: Invesco S&P SmallCap Health Care ETF (PSCH)

ETFs to Buy: Invesco S&P SmallCap Health Care ETF (PSCH)
Source: Shutterstock

Expense Ratio: 0.29%

Keeping with the themes of smaller healthcare stocks, the Invesco S&P SmallCap Health Care ETF (NASDAQ:PSCH) is enjoying a banner 2018 with a breathtaking gain of 46.7%. That underscores the point that healthcare has been a primary of driver of small caps’ out-performance this year.

“Also, heath care in small caps is having its second best year on record, up 47.4%, the best ytd performance since 2000.  That is also driving the S&P 600 Growth (TR) that has nearly 20% in health care to have its second best ytd performance on record, up 23.5% – the most since 2003,” according to S&P Dow Jones Indices.

Investors are gravitating to PSCH. The ETF currently has $1.17 billion in assets under management, of which $666 million has flowed into the fund this year. That is good for the third-best total among all Invesco ETFs.

ETFs to Buy: ALPS Clean Energy ETF (ACES)

Expense Ratio: 0.65%

The ALPS Clean Energy ETF (NYSEARCA:ACES) is the newest ETF highlighted here, having debuted at the end of June. Youth does not diminish the utility of ACES for investors looking to tap next-generation energy investments.

This ETF provides exposure to seven alternative energy themes, including established plays such as solar and wind, as well as electric vehicles and fuel cells. The rookie ETF focuses on U.S. and Canadian companies, helping reduce the risks associated with owning international clean energy companies, some of which are financially challenged and many of which reside in the slumping emerging markets category.

“The transition to clean energy is not just about adding more renewables. It’s about cleaner and smarter technologies transforming worldwide production and consumption of energy,” according to ALPS.

As of this writing, Todd Shriber does not own any of the aforementioned securities.


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