U.S. Markets closed

5 ETFs for January

Sanghamitra Saha
Phillips 66 (PSX) possesses the right combination of the two key ingredients for a likely earnings beat in its upcoming report. Get prepared with the key expectations.

The broader market kicked off 2018 on a positive note. And why not? Traditionally, January brings with it seasonal tailwinds for the equity world. A consensus carried out from 1950 to 2017 shows that January ended up offering positive stock returns in 40 years and negative returns in 28 years, per moneychimp.com, with an average positive return of 0.80%.

Given this historical market performance, let’s take a look at the ETFs that can be intriguing bets for the month.

Energy

Oil prices made a sharp comeback to close out the year 2017, though the whole year was not so smooth. Oil hovered around the highest level in more than two years after a pipeline explosion limited output in OPEC member Libya. The OPEC output cut deal too should give a boost to oil prices and help energy ETFs.

Plus, natural gas ETFs enjoy a seasonal benefit in the first quarter as extreme cold boosts demand for heating. This should keep United States Natural Gas UNG and United States 12 Month Natural Gas UNL on an upward trajectory. UNG gained about 10.7% in the last five days (as of Dec 28, 2017) (read: 3 ETF Losers of 2017 That Can Rebound in Q1).

Small-Cap Value

Small-cap securities have historically proven their outperformance in January. After all, consumer sentiment has been upbeat lately as evident from record holiday shopping. This ensures that the domestic economy is in good shape (read: 3 ETFs & Stocks to Play the January Effect).

And as small caps are more attached to the domestic economy, investors can find small-caps a good option to play. Plus, expected benefits from tax reform should give such pint-sized stocks a lift ahead. However, with the cold and frosty month likely to keep many consumers inside, it’s better to play a small-cap value stock over a growth one.  Investors can take a look at Legg Mason Small-Cap Quality Value ETF SQLV.

Materials

According to a 2005 academic paper, “manufacturing and production stocks (e.g., consumer durables, chemicals, construction, mining, steel) outperform between November 1st and April 30th”, quoted on investingdaily.com.

Equity Clock also indicated that higher demand related to industrial production through the spring months feeds into seasonal strength in the material sector from Nov 20 through to May 5. Notably, the IHS Markit US Manufacturing PMI rose to 55.1 in December of 2017 from 53.9 in November and above a preliminary of 55. The data hints at the quickest clip of growth in factory activity since March of 2015.

This makes Materials Select Sector SPDR ETF XLB our pick for January. The sector is also poised to perform better ahead if Trump’s proposed infrastructure reform sees the light of day (read: ETF Strategies Based on Billionaires' Choices).

Technology

Tech stocks also enjoyseasonal strength from Oct 9 through to Feb 15. The recently concluded fourth quarter encompassed holiday sales. Electronics sales were in a sweet spot in the latest Black Friday deals. So, tech stocks and ETFs can be momentum plays. The seasonality dies when tech companies come up with fourth-quarter earnings.

Here, our pick is iShares PHLX Semiconductor ETF SOXX. Since semiconductor companies make components for electronics, these should gain traction (read: 5 Tech ETFs That Crushed FANG ETFs in 2017).

Soybeans

As per an article published on seekingalpha.com, as “it is the winter season in the U.S., the growing and harvest seasons in the Southern Hemisphere will dictate the path of least resistance for the price of the oilseed in the first half of 2018.”

Now, worries over dry conditions in Argentina should support soybean prices in the near term. A subdued greenback is another tailwind in this commodity investing. Teucrium Soybean ETF SOYB was up about 0.4% on the first trading day of January on short-term beneficial factors, but the long-term outlook is still bleak (see all agricultural ETFs here).

Want key ETF info delivered straight to your inbox?

Zacks' free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
ISHARS-PHLX SEM (SOXX): ETF Research Reports
 
SPDR-MATLS SELS (XLB): ETF Research Reports
 
US-12M NATL GAS (UNL): ETF Research Reports
 
TEUCRM-SOYBEAN (SOYB): ETF Research Reports
 
LM-SMALLCAP QV (SQLV): ETF Research Reports
 
To read this article on Zacks.com click here.
 
Zacks Investment Research
 
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report