I think that the best ETFs will outperform the S&P by a wide margin this year. I’ve contended for a while that the S&P 500 was dominated by a small number of large tech names that had major problems, making the index vulnerable to sharp retreats.
In the last couple of months, that thesis has been proven at least somewhat valid, as Facebook (NASDAQ:FB) stock crashed, pulling down the S&P with it.
Of course, picking the best ETFs is no easy task. In what follows I’ll use the same method that I’ve used in the past with some success over the long term. Specifically, I will select ETFs whose long-range potential the market seems to be greatly underestimating.
In that category are the following ETFs:
- First Trust Natural Gas ETF (NYSEArca:FCG)
- ETFMG Prime Cyber Security ETF (NYSEArca:HACK)
- Invesco Dynamic Leisure and Entertainment ETF (NYSEArca:PEJ)
- iShares U.S. Aerospace & Defense ETF (BATS:ITA)
- iShares Biotechnology ETF (NASDAQ:GM:IBB).
Best ETFs to Buy: First Trust Natural Gas ETF (FCG)
The shares have jumped 33% since September, but I think they will climb much further. European natural gas prices soared “more than 300% in 2021” and have jumped even more recently amid the Russian-Ukrainian conflict.
Further, European countries are quite actively looking for alternatives to Russian natural gas. In that environment, U.S. natural gas exports to Europe should surge, lifting U.S. natural gas prices and the top and bottom lines of many components of this ETF.
The continued shutting down of coal plants in the U.S. and more extreme weather in both winters and summers should also be very bullish for this ETF.
Finally, the electrification of transportation should also cause the demand for natural gas, in the U.S. and elsewhere, to jump over the medium term and the long term.
ETFMG Prime Cyber Security ETF (HACK)
Russia’s cyberattacks leveled against Ukraine have sparked fears that President Vladimir Putin’s forces could level similar attacks against the U.S. and its allies.
Wedbush analyst Dan Ives is among those who have asserted that Moscow could indeed unleash cyberattacks, causing both firms and Western governments to step up their cybersecurity efforts.
In such an environment, most U.S. cybersecurity companies should do very well financially. Moreover, there are multiple signs that, even before this crisis began, the cybersecurity sector was thriving.
Also reporting stronger-than-expected quarterly results recently was Israeli cybersecurity company CyberArk (NASDAQ:CYBR). Its Q4 EPS, excluding certain items, was 28 cents, versus analysts’ average estimate of 12 cents.
What’s more, given the strong demand for cybersecurity, I would not be at all surprised if a significant number of cybersecurity companies become takeover targets. In the past, cybersecurity companies McAfee and Proofpoint, while Cisco (NASDAQ:CSCO) and Palo Alto have made many acquisitions in the sector.
The Invesco Dynamic Leisure and Entertainment ETF (PEJ)
As mask restrictions ease internationally, travel stocks should thrive.
On Feb. 24, Live Nation (NYSE:LYV), the Invesco Dynamic Leisure ETF’s largest component, rallied after the company reported higher-than-expected Q2 revenue
According to Seeking Alpha, all the company’s divisions are on a growth trajectory. Moreover, the operating income of its ticketing unit jumped 119% year-over-year. Its gross transaction volume surged 20% versus the same period in 2019. The company’s results suggest that many travel stocks are starting to benefit significantly from pent-up demand.
The fund’s third, fourth, and fifth largest holdings —Marriott (NASDAQ:MAR), Booking Holdings (NYSE:BKNG) and Expedia (NASDAQ:EXPE) — are also poised to get a big lift from the reinvigoration of the travel sector. Its second-largest component, McDonald’s (NYSE:MCD), should benefit tremendously from the normalization of eating out trends.
iShares U.S. Aerospace & Defense (ITA)
Clearly, Russia’s invasion of Ukraine has made many countries worried that they may also become the victims of an attack by belligerent neighbors.
Russia’s neighbors, China, and Iran are all likely to become more concerned by the invasion, particularly if Russia emerges as a winner or even fairly unscathed from the invasion.
Germany decided to increase its defense spending above 2% of its total GDP for the first time in decades. The U.S., which had been focusing on defending its East Asia allies, will have to put more resources into defending its European friends again.
Consequently, at the very least, I believe that cuts in American defense spending are off the table for the foreseeable future.
iShares Biotechnology ETF (IBB)
Investor’s Business Daily recently argued that the biotech sector was well-positioned for two reasons. First, a number of the largest companies in the sector generated a great deal of cash from the coronavirus crisis. Second, many smaller biotech companies are on the verge of making momentous breakthroughs.
Most of iShares Biotechnology ETFs largest holdings are relatively big biotech firms. These companies should benefit meaningfully from both their own breakthroughs and the acquisition of smaller companies that have made innovative, highly profitable drugs.
In the year that ended on Feb. 28, IBB stock tumbled 22%, amid worries about federal regulation of drug prices and higher interest rates.
Given the large amount of campaign cash that Democrats have received from drug companies, I think the fears about regulation are way overblown. Meanwhile, the market is starting to realize that most Fed members have no interest in torpedoing the economy and stocks by aggressively raising rates in order to meet the central bank’s 2% inflation target.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Larry Ramer has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.