[Editor’s note: This article was previously published in December 2017. It has since been updated and republished to reflect new fund information.]
The best exchange-traded funds (ETF) that you should buy will likely be funds that concentrate their holdings in sectors that can beat the broad market indices.
As is the case in almost every calendar year, some of the best ETFs will be top funds from the previous year that continue their momentum into the new year, while others will be recent laggards that make a big turnaround.
But picking the best ETFs for an entire year can be challenging, especially because there are always scenarios that play out that no one could have predicted accurately in advance.
Therefore, the smart bets for the top ETFs will be a diverse list of funds that combine the best momentum plays based upon what we know now along with some contrarian bets that go against the herd consensus.
So, with that backdrop, here are the seven of the best sector funds that can lead the market …
iShares Edge MSCI USA Momentum Factor (MTUM)
Expenses: 0.15%, or $15 annually for every $10,000 invested
Momentum will be a major theme of markets and the best way to capture the trend is iShares Edge MSCI USA Momentum Factor (NYSEARCA:MTUM).
Although this ETF does not focus on one single sector, it’s a great way to gain exposure to momentum stocks that will inevitably come from the leading sectors, without having to identify them yourself.
MTUM offers shareholders exposure to momentum in the market by passively tracking the performance of an index of large- and mid-cap stocks with high relative momentum characteristics.
Financial Select Sector SPDR Fund (XLF)
With rising interest rates and a resilient stock market, financial stocks should maintain leadership, which makes ETFs like the Financial Select Sector SPDR Fund (NYSEARCA:XLF) a smart fund to hold.
Higher rates generally translate into wider spreads for financial institutions that lend money, and a healthy stock market means higher profits for the big brokerage firms and other large financial companies involved in capital markets.
Energy Select Sector SPDR (XLE)
Although energy was a lagging sector for much of the past few years, signs of life emerged and this momentum has legs to move into 2019, which would benefit top energy ETFs like Energy Select Sector SPDR (NYSEARCA:XLE).
XLE tracks the Energy Select Sector Index, which consists of 25 stocks of companies in the oil and gas industries, as well as energy equipment and services.
PowerShares S&P SmallCap Information Technology (PSCT)
Technology promises to continue as a market leader this year and funds like PowerShares S&P SmallCap Information Technology (NYSEARCA:PSCT) could be smart bets in the tech sector.
After a period of small-caps lagging large-caps, the trend started to turn around, which could make PSCT a smart momentum growth bet.
PSCT passively tracks the S&P SmallCap 600 Capped Information Technology Index, which is an S&P SmallCap 600 subset that consists of small-cap stocks of companies that provide information technology-related products and services.
Health Care SPDR (ETF) (XLV)
Health sector ETFs have taken a hit recently, but they have returned to market leadership, which makes now a good time to consider holding funds like the Health Care SPDR (ETF) (NYSEARCA:XLV).
The health sector can work as a long-term growth play or a short- to intermediate-term defensive play, which makes health stocks like XLV top holdings Johnson & Johnson (NYSE:JNJ), Pfizer Inc. (NYSE:PFE) and UnitedHealth Group Inc (NYSE:UNH) a good idea to hold in almost any portfolio.
XLV has a good balance of health sector stocks, which means it won’t be as volatile as some of the health sector ETFs that are more concentrated in sub-sectors of health. This diversification can also serve as added insulation amid health legislation talks in Congress.
Vanguard Utilities ETF (VPU)
The utilities sector has quietly remained just behind the major market indices for performance the past few years, and it has recently picked up momentum. Combined with their defensive qualities, utilities ETFs look good for 2019.
The Vanguard Utilities ETF (NYSEARCA:VPU) passively tracks an index that consists of 75 quality U.S. utilities stocks like NextEra Energy Inc (NYSE:NEE), Duke Energy Corp (NYSE:DUK) and Southern Co (NYSE:SO).
The defensive nature of utilities will show its value once the stock market sees another major correction, which remains a real possibility in 2019.
Consumer Staples Select Sect. SPDR (ETF) (XLP)
Diversification will likely be a major theme in 2019 and a smart move for that purpose is to hold a defensive stock ETF like the Consumer Staples Select Sect. SPDR (ETF) (NYSEARCA:XLP).
If stocks continue their climb, this year will see the nine-year anniversary for the bull market, which is getting old by historical standards. Therefore, now is arguably one of the best times in a decade to begin shifting portfolio holdings to a more defensive posture.
As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities. However, he holds XLE, XLV and XLP in some client accounts. Under no circumstances does this information represent a recommendation to buy or sell securities.