With just a few trading days left in the first quarter of 2019, the S&P 500 is up nearly 14%. That comes after the benchmark U.S. equity gauge notched one of its best January/February performances on record.
Some of the best exchange traded funds (ETFs) this year are delivering performances well in excess of broader markets, potentially setting the stage for more excitement in the second quarter. And let’s talk about the second quarter. If history holds true to form, the S&P 500’s performances get worse as the quarter moves along.
April is the best month of the second quarter, with the average S&P 500 gain in the fourth month of the year over the past two decades being 1.70% before declining to an average May gain of just 0.30%. June is forgettable as the S&P 500 averages a loss of 0.70% in the sixth month of the year.
Those seasonal trends are not guaranteed to repeat and there are opportunities for funds to join the ranks of the best ETFs as well as notable sector-level opportunities throughout the April through June time frame. Here are some of the best ETFs to consider in the second quarter.
Best ETFs for Q2: Energy Select Sector SPDR (XLE)
Expense Ratio: 0.13% per year, or $13 on a $10,000 investment.
After ranking as one of last year’s worst commodities, oil is back with a vengeance this year. In fact, crude’s first-quarter showing is on track for one of its best ever. The Energy Select Sector SPDR (NYSEARCA:XLE) is proving to be one of the best ETFs to with which to ride oil’s resurgence as the largest energy ETF is up 17% this year.
Here is the thing about considering XLE or any other oil ETF as a second-quarter play: like other commodities, oil can be affected by seasonal trends. No matter what the so-called experts say about the summer travel season, oil’s historically favorable seasonal period is February to May, meaning XLE could be one of the best ETFs for the second quarter for some but not all of the quarter.
Investors will get plenty of information about XLE’s ability to perform well in the second quarter when Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) report first-quarter earnings in April because the two largest U.S. oil companies combine for about 40% of XLE’s weight.
Utilities Select Sector SPDR (XLU)
Expense Ratio: 0.13%
The Utilities Select Sector SPDR (NYSEARCA:XLU) could be one of the best ETFs for conservative investors in the second quarter. XLU has some favorable seasonality on its side as it ranks as the best-performing sector SPDR fund in the month of June while also being solid performer throughout much of the third quarter.
XLU is already up 10.9% this year, indicating expectations that the Federal Reserve will not raise interest rates this year are mostly baked into the fund. Interestingly, the probability of a Fed rate cut late this year is rising, and if it continues to do so, XLU could assert itself as one of the best ETFs over the next several months.
XLU could also be one of the best ETFs for investors looking to remain involved with equities while looking to limit some of the downside that can come if stocks retreat in the latter stages of the second quarter.
VanEck Vectors Video Gaming and eSports ETF (ESPO)
Expense Ratio: 0.55%
Up 18.8% year-to-date, the VanEck Vectors Video Gaming and eSports ETF (NYSEARCA:ESPO) has recently been building momentum and has been notching a series of record highs. Naysayers will note this thematic ETF is just a few months old, but age is not the important number with ESPO. More important are the slew of fundamental factors confirming this fund’s status as a potent, disruptive ETF.
You do not have to be a gamer, nor do you have to watch eSports on television, to benefit from ESPO. As it is, those trends are growing exponentially and advertisers are taking notice.
“It’s game-on for advertisers in professional videogaming — e-sports — which has blossomed into a multibillion-dollar industry,” reports Jon Swartz for Barron’s. “EMarketer forecasts that U.S. digital ad revenue for e-sports will pass $200 million by 2020. Ad spending, which has grown mostly through corporate sponsorships, media rights, ticket sales, and merchandising, will grow 25% to $178.1 million this year, and another 20% to $213.8 million in 2020, eMarketer says.”
Pacer Benchmark Industrial Real Estate SCTR ETF (INDS)
Expense Ratio: 0.6%
As has been widely documented, the retail industry is being disrupted in significant fashion with much of that disruption coming at the expense of traditional brick-and-mortar retailers. While e-commerce companies and online retailers may not have physical stores, they do need commercial real estate — and lots of it.
Enter the Pacer Benchmark Industrial Real Estate SCTR ETF (NYSEARCA:INDS). As its name implies, INDS focuses on industrial REITs. In fact, INDS is the best ETF for doing just that because traditional REIT funds lack adequate exposure to industrial REITs. There are plenty of fundamental factors that confirm INDS’ bonafides, but considering the following data point.
“Bank of America projects there is a total addressable market for e-commerce B2B (business-to-business) of $1.4 trillion by 2021, which is nearly double the firm’s estimated $761 billion market for consumer e-commerce,” reports CNBC.
U.S. IPO ETF (IPO)
Expense Ratio: 0.6%
Up 34.5% this year, the U.S. IPO ETF (NYSEARCA:IPO) is already one of this year’s best ETFs, but that status could be cemented in the second quarter if some of this year’s IPO “unicorns” come to market as expected.
“The ETF tracks the rules based Renaissance IPO Index, which adds sizeable new companies on a fast entry basis and the rest upon scheduled quarterly reviews. Companies that have been public for two years are removed at the next quarterly review,” according to the issuer.
In other words, when some of the PULPS — Pintrest, Uber, Lyft, Postmates and Slack — come public, the U.S. IPO ETF can move swiftly to get those stocks into its portfolios.
Global X S&P 500 Quality Dividend ETF (QDIV)
Expense Ratio: 0.35%
While growth stocks and the FAANG quintet are bouncing back in the first quarter, some of the best ETFs are those with exposure to the quality factor. As the Global X S&P 500 Quality Dividend ETF (CBOE:QDIV) illustrates, there are often important intersections between the quality factor and dividend stocks.
“While there are a handful of definitions for quality, S&P defines it as a combination of a company’s return on equity (profitability), debt to book value (financial leverage), and its change in net operating assets (accruals ratio),” according to Global X research. “Companies that score well across these three metrics tend to make good use of invested capital, avoid taking on too much risk through borrowing, and generate strong cash flow.”
QDIV, which tracks the S&P 500 Quality High Dividend Index, holds 71 stocks, and just because this is a dividend fund, that does not mean investors have to forsake growth. The consumer discretionary and technology sectors combine for over 35% of QDIV’s weight. Adding to its best ETF status, QDIV pays a monthly dividend.
iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB)
Expense Ratio: 0.39%
Fixed-income funds usually do not generate performances worthy of best ETFs consideration, but the iShares J.P. Morgan USD Emerging Markets Bond ETF (NASDAQ:EMB) is higher by 6%, which is impressive among bond funds.
The more sanguine outlook for U.S. interest rates, including the aforementioned chance of a cut later this year, is bolstering the case for dollar-denominated emerging markets debt.
“The brightening bond-market outlook shows how the weakest economic growth since the global financial crisis is boosting the case for the Federal Reserve’s dovish turn, limiting the dollar’s gains and allowing other central banks around the world to follow suit,” according to Bloomberg.
EMB, the world’s largest emerging markets bond fund, holds nearly 470 bonds and has an effective duration of 7.31 years.
KraneShares Bosera MSCI China A ETF (KBA)
Expense Ratio: 0.6%
The KraneShares Bosera MSCI China A ETF (NYSEARCA:KBA) is already one of this year’s best ETFs and several other A-shares funds have best ETFs due in large part to the recent announcement that MSCI is boosting its international indexes’ exposure to the stocks that trade on mainland China.
That news is particularly relevant to KBA because it tracks an index devoted to the inclusion of A-shares in MSCI indexes, meaning the fund’s benchmark is loaded with stocks that are going to be making the move into the famed MSCI Emerging Markets Index, among other benchmarks.
“We believe that the MSCI China A Inclusion Index (KBA’s index) has distinct advantages over other popular Mainland China benchmarks, in particular, the CSI 300 Index,” according to KraneShares research. “The CSI 300 Index, originally built for domestic Chinese investors, consists of the 300 largest China A-Share stocks ranked by market capitalization. In comparison, the MSCI China A Inclusion Index currently tracks 239 securities deemed most suitable for international investors by MSCI.”
ETFMG Prime Mobile Payments ETF (IPAY)
Expense Ratio: 0.75%
Up 23% year-to-date, the ETFMG Prime Mobile Payments ETF (NYSEARCA:IPAY) is already one of the best ETFs for investors looking for alternatives to traditional financial services ETFs.
When comes to funds like IPAY, investors are hearing plenty about the move away from cash, how the mobile payments industry is taking off and how those themes are benefiting stocks like PayPal (NASDAQ:PYPL) and Square (NYSE:SQ).
Another factor bolstering the case for mobile payments funds is increased industry consolidation. In just the first quarter of this year, two of the industry’s largest deals on record have been announced, confirming that an excellent way for mobile payments to build scale and increase their moats is via acquisitions.
SPDR S&P MIDCAP 400 ETF (MDY)
Expense Ratio: 0.24%
From a seasonal perspective, the SPDR S&P MIDCAP 400 ETF (NYSEARCA:MDY) is one of the best ETFs to consider in the second quarter because the mid-cap fund’s average April and May gains overshoot those of the S&P 500 and the S&P MidCap 400 Index historically falters in June, it does so by less than the large-cap S&P 500.
Beyond seasonality, mid-cap funds are some of the best ETFs for long-term investors to consider. Mid-cap stocks have outperformed large-caps for decades. Stocks in the $2 billion to $10 billion market cap range also often outpace small caps and do so with less volatility.
The $19.55 billion MDY has a cyclical feel as it allocates almost a third of its weight to the technology and financial services sectors. Industrial and consumer discretionary names combine for almost 27% of the fund’s weight.
As of this writing, Todd Shriber does not own any of the aforementioned securities.