U.S. Markets closed

10 Sector ETFs That Could Stand Out in the New Year

This article was originally published on ETFTrends.com.

The U.S. equity rally is beginning to lose steam and investors should not expect markets to maintain their breakneck spurt of yesteryear. Nevertheless, traders may still find value in some battered sectors and related exchange traded funds.

Bank of America Merrill Lynch argued that there is a good chance stocks will peter out next year due to tighter credit conditions and slowing earnings growth, CNBC reports.

"We believe the peak in equities is likely before the end of 2019," Savita Subramanian, equity and quantitative strategist at Bank of America Merrill Lynch, said in a note, projecting the the S&P 500 to rise slightly to 3,000 before the end of this year and then fall 3 percent in 2019 to 2,900.

"Assuming the market peaks somewhere at or above 3000, our forecast is for modest downside in 2019," Subramanian added.

Nevertheless, investors can still pick and choose areas to play in the U.S. equity market. Specifically, Subramanian recommended exposure to health care, technology and financials sectors.

Investors who are interested in gaining exposure to these sectors have a number of broad sector-specific ETFs to choose from. For example, the Technology Select Sector SPDR ETF (XLK) , Vanguard Information Technology ETF (VGT) and iShares US Technology ETF (IYW) can help investors access the tech segment.

Investors can gain exposure to health care sector through related ETFs like the Health Care Select Sector SPDR ETF (XLV) , Vanguard Health Care ETF (VHT) and iShares US Healthcare ETF (IYH) .

Additionally, the Financial Select Sector SPDR (NYSEArca: XLF) , Fidelity MSCI Financials Index ETF (FNCL) , iShares U.S. Financials ETF (IYF) and Vanguard Financials ETF (VFH) provide broad exposure to many well-known financial company names.

Subramanian argued that health care is "cheap" compared to historical levels and is trading at a discount to the S&P 500. Health care fundamentals are strong, with over half of the companies beating earnings and sales estimates during the third quarter.

Technology also appears "cheaper" and less crowded after the big sector reorganization moved high-flyers like Netflix and Facebook out of the sector. "Positioning risk is neutral to positive," Subramanian said.

Lastly, financials companies could strengthen as the sector increases its buyback programs. "Whereas other sectors have been buying back shares for almost a decade, Financials were disallowed until recently. But Financials' share buybacks have ticked up substantially, and the sector has the second highest dividend growth in the S&P 500," the strategist added.


For more information on the market sectors, visit our sector ETFs category.