There are just a few weeks left in 2018, meaning now is an opportune time for investors to consider ideas and strategies for 2019. Whether it is some tax-loss harvesting or standard portfolio adjustments, investors can tap exchange-traded funds (ETFs) for a variety of objectives in 2019 and beyond. But which are the best ETFs?
With an eye toward 2019, some of next year’s best picks could be funds that were laggards this year, while other members of the best ETFs of 2019 class could be funds that were strong amid myriad macro challenges in 2018.
Of course, there are bound to be a slew of factors determining next year’s winners. Markets get the benefit of 2019 not being an election year, but the Federal Reserve is expected to continue hiking interest rates next year, potentially plaguing some beloved income-generating assets and sectors.
Before the ball drops on 2018, consider some of the following funds as candidates for best ETFs status in 2019.
iShares U.S. Healthcare Providers ETF (IHF)
Expense Ratio: 0.43% per year, or $43 on a $10,000 investment.
Due in large part to the October swoon, the universe of non-leveraged, plain vanilla ETFs that are up at least 20% year-to-date is scantly populated. The iShares U.S. Healthcare Providers ETF (NYSEARCA:IHF) is one of the best ETFs in 2018 and has a chance to replicate that status next year.
The $1.14 billion IHF, which tracks the Dow Jones U.S. Select Healthcare Providers Index, could have been a fund vulnerable to the outcome of the recent midterm elections, Indeed, IHF has traded modestly lower this month, but nothing about the fund’s recent price action is alarming. Dow Jones component UnitedHealth Group (NYSE:UNH) sets the table for IHF as the stock commands more than 13% of the fund’s weight, well above any of IHF’s 46 other holdings.
IHF could be one of the best ETFs in 2019 if Congress is able to make adjustments to Obamacare that markets view as favorable to healthcare providers.
Pacer US Cash Cows 100 ETF (COWZ)
Expense Ratio: 0.49%
Like other broad market strategies, the Pacer US Cash Cows 100 ETF (BATS:COWZ) was pinched by the October swoon and now sports a year-to-date loss, albeit small. Recent price action belies the ability of COWZ to be one of the best ETFs next year.
As its name implies, this is a strategy that focuses on companies that generate free cash flows at impressive clips. The fund holds the 100 members of the Russell 1000 Index with the highest trailing 12-month free cash flow yields. The free cash flow yield on COWZ is 7.88%, more than double the comparable yield on the Russell 1000. COWZ could also be one of the best ETFs to own if interest rates continue climbing next year.
“The top 100 highest yielding free cash flow companies in the US large-cap Russell 1000 Index outperformed the broad index by nearly 13% in periods of rising rates and by nearly 3% in periods of falling rates between December 31, 1991 and September 28, 2018,” according to FTSE Russell.
ProShares Online Retail ETF (ONLN)
Expense Ratio: 0.58%
With the holiday shopping season here, the ProShares Online Retail ETF (NYSEARCA:ONLN) is one of the best ETFs to consider right now. However, the ongoing shift away from brick-and-mortar retailers to e-commerce makes ONLN one of the best ETFs for capturing sustainable, long-term trends in the retail space.
“Looking back a year to the 2017 holiday season, strong results lifted all boats, as both brick and mortar retailers and more online-focused players rallied,” according to Maryland-based ProShares. “As the January rally halted, online retail resumed its outperformance all the way through the summer, when an indiscriminate sell-off in technology shares drove online retail underperformance over the last two-plus months.”
ProShares Investment Grade — Interest Rate Hedged (IGHG)
Expense Ratio: 0.3%
“Turmoil” might be a stretch, but fixed-income markets have seen their share of volatility this year, much of it attributable to Federal Reserve tightening. With another interest rate hike likely coming in December and possibly several more next year, it is not unreasonable to expect 2019 will be another trying year for traditional bond strategies.
The ProShares Investment Grade — Interest Rate Hedged (BATS:IGHG) could be one of the best ETFs to consider in the bond space next year. IGHG is already cementing its best ETFs status. No, its year-to-date loss of just over 4% is nothing to brag about, but it is far better than the 8% lost by the largest investment-grade bond ETF, which does not hedge interest rate risk.
IGHG has a net effective duration of 0.00 years, meaning its sensitivity to changes in interest rates is essentially non-existent. Even with that, IGHG throws off a solid 30-day SEC yield of 4.34%.
iShares Intermediate-Term Corporate Bond ETF (IGIB)
Expense Ratio: 0.06%
While not an interest-rate-hedged product, the iShares Intermediate-Term Corporate Bond ETF (NASDAQ:IGIB) is a compelling fixed income option for 2019. The ETF’s effective duration is just over six years, but credit quality is mostly solid as over 43% of this best ETF’s holdings are rated A or higher.
“Given its relatively longer duration, the fund’s new benchmark will be more sensitive to changes in interest rates than its former one and thus incrementally more volatile,” according to Morningstar. “From January 1977 through September 2018, the fund’s new index outpaced the corporate-bond Morningstar Category average and the Bloomberg Barclays Corporate Bond Index by 55 and 36 basis points annualized, respectively.”
The $5.59 billion IGIB tracks the ICE BofAML 5-10 Year US Corporate Index, a benchmark the ETF switched to in August.
iShares Edge MSCI USA Quality Factor ETF (QUAL)
Expense Ratio: 0.15%
Rising equity market volatility has some investors embracing volatility-reducing strategies, including the low volatility and value factors. However, low volatility and value stocks are not risk-free bets. Some low volatility strategies are loaded with rate-sensitive sectors while value funds can be pinched by declines in energy and bank stocks. Additionally, some value ETFs are home to companies with massive debut burdens, an important consideration at a time when market observers expect huge sums of barely investment-grade corporate bonds to be downgraded to junk status next year.
The iShares Edge MSCI USA Quality Factor ETF (BATS:QUAL) is proving to be one of the best ETFs in the face of rising volatility.
“Shares of quality companies have been outperforming the broad benchmarks — both before the October market correction and on the bounce of the past two weeks,” reports CNBC.
Quality companies usually have strong balance sheets, strong credit ratings and the potential to grow dividends. Plus, quality stocks can be less volatile than broad market funds. QUAL proves as much with a three-year standard deviation that is slightly below the S&P 500’s.
ALPS International Sector Dividend Dogs ETF (IDOG)
Expense Ratio: 0.5%
International stocks are getting drubbed this year as highlighted by a 9.29% year-to-date decline for the MSCI EAFE Index. The laggard status of developed markets outside the U.S. could mean that the asset class is becoming a value play, opening the door for funds like the ALPS International Sector Dividend Dogs ETF (NYSEARCA:IDOG) to be among 2019’s best ETFs.
IDOG allocates over two-thirds of its weight to European stocks, a group that has been savagely repudiated in 2018. That includes a 20.1% weight to the U.K., a market trading at significant valuation discounts relative to major U.S. equity benchmarks. Japan, almost 10% of IDOG’s weight, is another major developed market that is inexpensive compared to the U.S.
IDOG’s 30-day SEC yield is 5.17%, underscoring the point that this is a yield-driven strategy, but what makes IDOG one of the best ETFs for 2019 is its value traits and the steady dividend growth seen in major developed markets like Australia, Japan and Switzerland.
SPDR S&P North American Natural Resources ETF (NANR)
Expense Ratio: 0.35%
The SPDR S&P North American Natural Resources ETF (NYSEARCA:NANR) is dominated by the materials and energy sectors, two groups that are getting torched this year, but there is more to the story regarding NANR’s potential as one of the best ETFs for 2019.
NANR could be one of the best ETFs next year if the Consumer Price Index (CPI), a widely followed inflation gauge, spikes higher.
“Historically, shares of natural resources companies have performed well in inflationary environments because earnings are closely linked to the value of the underlying commodity produced by the firm,” said State Street in a recent research piece.
“As such, when inflation erodes the value of the U.S. dollar, the value of the underlying commodity and the firm’s shares both rise.”
WisdomTree U.S. SmallCap Dividend Fund (DES)
Expense Ratio: 0.38%
Small-cap funds enjoyed some good times for much of the first three quarters of 2018, but that theme recently eroded in significant fashion. That does not mean small-cap weakness will linger into 2019, however. For investors considering smaller stocks, dividends make this group less volatile, meaning the WisdomTree U.S. SmallCap Dividend Fund (NYSEARCA:DES) could be one of 2019’s best ETFs among small-cap funds.
DES’s underlying index has a dividend yield of 4%, well above what investors will find on broader small-cap benchmarks like the Russell 2000 Index and the S&P SmallCap 600 Index. Plus, DES’s price-to-cash flow yield is well above what investors will find on traditional small-cap funds.
DES allocates almost 35% of its combined weight to industrial and consumer discretionary stocks and the fund pays its dividend monthly, making it one of the best ETFs for investors looking for steady, regular income.
iShares Core MSCI Emerging Markets ETF (IEMG)
Expense Ratio: 0.14%
Emerging markets are among the ex-U.S. assets getting drubbed this year, but with expectations in place for a weaker dollar and some investors seeing value in the asset class, some of the best ETFs next year could be emerging markets funds.
Data suggest investors are revisiting emerging markets. Investors’ exposure to emerging market equities surged to 13% in November from 5% in October, according to a survey performed by Bank of America Merrill Lynch.
The iShares Core MSCI Emerging Markets ETF (NYSEARCA:IEMG) is the second-largest emerging markets ETF by assets and one of the least expensive. IEMG holds nearly 1,900 stocks, over 28% of which are Chinese names.
As of this writing, Todd Shriber owned shares of DES.