Welcome to the final quarter of the 2018 Best ETFs contest, which is, admittedly, also our first Best ETFs contest.
It has been a wild year in U.S. markets. After three quarters, things remained remarkably tight at the top of the standings, while a few sectors that suffered from sentiment troubles continue to drag. Trade war fears have impacted almost everything in the contest this year, and the uneasiness could potentially get worse thanks to interest rate concerns. It just goes to show that no matter how well crafted your thesis is, sometimes the world — or the markets — can throw you a curveball.
As for how all these market dangers will shake out, only time will tell. And for now, time is running out for these ETFs to make their moves and try to take the Best ETFs contest crown.
Here they are, in reverse order by year-to-date gains through the end of September:
Market Vectors Rare Earth ETF (REMX)
Year-to-Date Change Through Q3: -33%
Expense Ratio: 0.61%
Investor: John Jagerson and Wade Hansen
Headline risks just will not let up on the Vaneck Vectors Rare Earth Strategic Metals ETF (NYSEARCA:REMX). As Jagerson and Hansen put it:
“As the trade-war rhetoric between not only the United States and China but also between the United States and Europe, Europe and Great Britain and the United States and multiple emerging-market economies continues to escalate, demand increases for rare earth metals seem to be stalling along with a number of other raw materials.”
It’s not that there won’t be growth in demand for the materials that REMX deals in going forward. The bigger issue seems to be that investors are not confident about which way this particular market is going in the short term and have moved to the sidelines until things settle down. As a result, REMX has retreated back to old support/resistance levels.
Even if things turn around, it’s unfortunately unlikely that REMX can catch up to the rest of the Best ETFs contest field.
iShares Emerging Markets Dividend ETF (DVYE)
YTD Change: -7%
Expense Ratio: 0.49%
Investor: Charles Sizemore
Emerging markets have just not had the oomph this year that investors would have liked. And thanks to that, the iShares Emerging Markets Dividend ETF (NYSEARCA:DVYE) has had a pretty rough 2018.
The pieces are still in place for DVYE to see some big growth … just maybe not right now. As Sizemore said, “While I still believe that emerging markets are likely to be one of the best-performing asset classes of the next 10 years, it’s a minefield in the short-term.”
What’s causing the trouble? Well, concerns about some of these emerging markets countries are the biggest issue. Argentina, Turkey, South Africa, Brazil, the Phillipines — questions about their economic strength and stability are making investors rightfully wary of their stocks. And the trade war between the U.S. and China certainly isn’t helping anything.
You’d be wrong to turn your back on emerging markets stocks, but for now, maybe just keep an eye on them until things stabilize.
Vanguard FTSE All-World ex-US Small-Cap ETF (VSS)
YTD Change: -6%
Expense Ratio: 0.13%
Investor: Jeff Reeves
While betting on emerging markets has hurt both the ninth- and eight-place entries in this contest, the first three quarters were slightly kinder to the Vanguard FTSE All World Ex-U.S. Small Cap ETF (NYSEARCA:VSS) than to DVYE.
There are a couple reasons for this. Part is undoubtedly thanks to VSS’s focus on small-cap stocks, but the bigger benefit probably comes from its geographic diversity. While it does have 20% exposure to emerging markets, the greater bulk of this fund is spread across more settled areas of the globe. Its top countries are Japan, the U.K. and Canada.
The small-cap focus does still mean that if this fund starts to grow, it can grow in a big way. Still, that growth may not make it in time for this year’s Best ETFs contest.
ETFMG Video Game Tech ETF (GAMR)
YTD Change: -1%
Expense Ratio: 0.82%
Investor: Robert Waldo
Given how much chatter has been going on in the markets around not only gaming companies but also those that make the computers and consoles — or parts for those computers and consoles — it’s a little surprising that the ETFMG Video Game Tech ETF (NYSEARCA:GAMR) isn’t doing better.
So, is it time to give up on GAMR? Not yet, though it is important to understand the sort of volatility that this fund can face. As Waldo pointed out:
“The holdings in this ETF are primarily based in consumer cyclical businesses. That means GAMR will generally ebb and flow with consumer consumption, and although there are plenty of long-term catalysts to be bullish about, they won’t necessarily be fully realized in video game ETFs until much further down the road.”
What are some of these long-term catalysts? We can start with the rise of esports. Or how about the fact that gaming is moving more mainstream every year. In years past, gamers were imagined as jobless slackers playing games in their parents’ basement. Now, everyone knows plenty of people who play video games — almost 3/4 of Americans play video games, largely on mobile devices.
A growing market and an increasingly lucrative one? Keep your eye on this one.
Powershares Water Resource Portfolio (PHO)
YTD Change: 5%
Expense Ratio: 0.62%
Investor: James Brumley
Water. It’s something we’ll all need, always. And because of that, investing in the Invesco Water Resources ETF (NASDAQ:PHO) remains an interesting proposition.
As Brumley points out, this isn’t the most fun sector. He says: “A water ETF is a lot of things, but sexy isn’t one of them. Though nobody can survive more than a few days without water, almost everyone who is reading this article takes their access to it for granted. As a result, many investors aren’t in love with companies in this sector.”
But a look at headlines suggests that maybe we should worry. Plentiful water isn’t everywhere, and some areas are experiencing, or getting close to experiencing, abnormally low water levels. Arizona has been keeping an eye on just such a problem for years.
This may not blow your socks off in the final quarter of the year, but it’s still a smart long-term holding to consider.
Energy Select Sector SPDR (ETF) (XLE)
YTD Change: 5%
Expense Ratio: 0.13%
Investor: Kent Thune
You might have heard that oil prices are showing some strength. This might be bad news for many transportation stocks, which could see their costs rise, but it’s great for the Energy Select Sector SPDR (NYSEARCA:XLE).
Now might be a great time to get in. XLE looks like it’s going to make a move toward the lead into the end of the year. No matter what your investment strategy, there are things to love about this fund. As Thune pointed out:
“One of the primary qualities of ETFs is the low-cost access to sectors and niche areas of the market. Whether you’re looking for short-term investment opportunities, income, growth or for diversification tools, ETFs can serve the purpose well. And while the energy sector may not be the first area of the market that comes to mind when looking for the best ETFs to buy, XLE can make a good satellite holding for diversification and it can be a good source of income.”
Now, XLE will probably be a pretty volatile name going forward. Supply changes can happen fairly quickly, after all.
Still, its movement also features generally low — sometimes negative — correlation with stocks as a whole. This could make XLE a good diversification tool.
Market Vectors Semiconductor ETF (SMH)
YTD Change: 9%
Expense Ratio: 0.35%
Investor: Dana Blankenhorn
Semiconductor stocks as a whole this year keep doing well. The VanEck Vectors Semiconductors ETF (NYSEARCA:SMH), for example, outperformed the S&P 500 through the first three quarters.
The reason for the optimism? The future is in the cloud, and SMH holds the companies that make the chips to power the cloud. Names like Taiwan Semiconductor (NYSE:TSM), Intel (NASDAQ:INTC) and Nvidia (NASDAQ:NVDA) make up about 30% of the SMH ETF. As Blankenhorn points out:
“Clouds were originally built with the cheapest possible chips and open source software, to generate a great price-performance. Now they’re being upgraded to serve artificial intelligence applications, with memory and graphics chips coming to the fore. That’s why Micron (NASDAQ:MU) and Nvidia are the stars of the chip show.”
And with 5G on the horizon, there could be more growth in the very near future. Even if it cannot win the Best ETFs contest, that could still be a win for investors.
SPDR S&P Biotech (ETF) (XBI)
YTD Change: 13%
Expense Ratio: 0.35%
Investor: Johnson Research Group
While stocks have been on a bit of a slide lately, the SPDR S&P Biotech (ETF) (NYSEARCA:XBI) finished the third quarter up 13%. This fund, which tries to mirror the returns of the S&P Biotechnology Select Industry Index, picks its constituents from across the biotech sector — including small-, mid- and large-cap stocks.
Like many U.S. stocks, biotechs had been buoyed by general market strength, but doubts began to creep in during the third quarter. The XBI ETF largely moved sideways — consider that at the midpoint of the year, its YTD gains were at 12%. Another quarter along, and it had only managed to climb to 13%.
Still, what you have here is an ETF made up of strong biotech stocks — and a pullback in these stocks could just be an excellent buying opportunity. Not to mention it’s still within reasonable striking distance of the Best ETFs contest frontrunners.
PowerShares QQQ Trust (QQQ)
YTD Change: 19%
Expense Ratio: 0.2%
Investor: Readers’ Choice
One of the best and worst parts of QQQ is the heavy weighting it has to Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN). These two juggernauts make up a good quarter of the ETF. This can be an Achilles heel when they’re doing poorly, but when they’re doing well — and so far this year they are doing quite well — they can lift the entire fund on their shoulders.
Tariff troubles could potentially put a lid on the QQQ ETF, but its biggest companies are not as much in harm’s way as you might think. It’s possible QQQ could climb back on top of the Best ETFs contest by the end of December.
ALPS Medical Breakthroughs ETF (SBIO)
YTD Change: 20%
Expense Ratio: 0.5%
Investor: Todd Shriber
The leader at the 3/4 point is another biotech ETF — the ALPS Medical Breakthroughs ETF (NYSEARCA:SBIO). As biotechs make more and more discoveries, it’s not just humanity at large that will profit. And while XBI looks at some of the bigger biotech names, SBIO concentrates more on the small- and mid-cap names — which means there’s more room here for growth.
As well as it has done, some investors might now be tempted to take their gains at this point in SBIO. As Shriber says:
“Taking profits is never a bad thing, but with a slew of SBIO components developing potentially groundbreaking drugs and therapies, this biotech ETF can deliver more upside into year-end and beyond.”
Innovation keeps the SBIO ETF forging ahead.
This is a great fund, which could very well hang onto the top spot in the Best ETFs contest.
Jessica Loder is an assistant editor at InvestorPlace.com. As of this writing, she did not hold a position in any of the aforementioned securities.