The first quarter of 2018 wasn’t exactly that wonderful for investors. It started out just fine — driven by rising GDP growth and expectations of the new Republican tax plan … but then things sort of fell out. Volatility returned with a vengeance and the market entered a downward spiral. The benchmark SPDR S&P 500 ETF Trust (NYSEARCA:SPY) dropped 2.64% in March after a 3.89% decline in February. All in all, the SPY managed to lose about 1.17% over the entire first quarter.
And so far, the losses and headaches keep coming during the second quarter.
For investors, this poses an interesting problem. How do you position your portfolio to limit any losses or find the scraps of potential returns out there? Luckily, the rise and popularity of exchange-traded funds (ETFs) makes it easy to make slight changes to your portfolio to take advantage of trends.
With that, here are five great ETFs to buy to play the second quarter and the market’s continued uneasiness.
Great ETFs for the Second Quarter: SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
Expense Ratio: 0.35%, or $35 per $10,000 invested annually.
Don’t look now, but energy prices are starting to rise in a big way. Since the downturn in 2015/2016, prices have continued to steadily rise higher as demand has finally started to outstrip supplies. Brent benchmarked crude is now over $73 per barrel, while West Texas Intermediate is over $67. That’s nearly triple what they were trading for at the recent lows. And with the global economy still cooking, analysts expect energy prices to “keep on keeping on” for the time being.
That makes the SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA:XOP) a power ETF to own for the second quarter.
The XOP bets on energy producers and the upstream segment of the sector. These firms’ profits are directly correlated to the rise and fall to energy prices. Higher average selling price for crude oil equals more earnings. And when it comes to energy ETFs, the XOP has been one of the best to exploit that relationship. It’s 69 holdings include stalwarts like Carrizo Oil & Gas Inc (NASDAQ:CRZO) and Continental Resources (NYSE:CLR). The best part is that they are equally weighted. That provides extra oomph in rising price environments.
Expenses run at just 0.35% or $35 per $10,000 invested.
With energy prices rising in the face of a new supply/demand dynamic, the XOP and its holdings should continue to benefit. That makes it one of the best ETFs to play the second quarter and the rest of the year.
Great ETFs for the Second Quarter: Vanguard Value ETF (VTV)
Expense Ratio: 0.05%
It’s no secret that “growth” has been king over the last few years. Tech stocks and high growth companies have been the market’s leaders and have driven much of the overall returns of the S&P 500. But lately, value has come back with a vengeance. As valuations metrics like P/E’s and CAPE have continued to go up to historic highs, investors have sort of hit an impasse on what they’ll pay for stocks.
As a result, value stocks — with their much cheaper metrics — have started to get the nod in portfolios.
This could make the Vanguard Value ETF (NYSEARCA:VTV) a huge winner going forward.
The $35.8 billion ETF tracks the CRSP US Large Cap Value Index — which is a measure of stocks featuring low price-to-earnings ratios, price-to-book ratios and other value-defining criteria. The ETF features 337 holdings with a heavy allocation to financials, healthcare, and industrials. Top holdings include Berkshire Hathaway Inc. (NYSE:BRK.A) and Chevron (NYSE:CVX).
The real reason why VTV could be the king of value ETFs is its low cost. Vanguard funds typically have some of the lowest fees in their class, and that’s the case with VTV, which charges a mere 0.05%. That’s only $5 per $10,000 invested. That helps you keep more of your gains, which in part are helped out by a current dividend yield of 2.45%.
For an investor looking to play the second quarter, VTV is one of the best broad ETFs to own.
Great ETFs for the Second Quarter: iShares U.S. Aerospace & Defense ETF (ITA)
Expense Ratio: 0.44%
Rising geopolitical tensions have been a major boon to defense contractors like Raytheon (NYSE:RTN) and Lockheed Martin (NYSE:LMT). With conflicts in North Korea and Syria continuing to rise, the trend for the defense sector is still bullish. And that doesn’t even include the rising budgets Congress is chucking their way.
And that’s why the iShares U.S. Aerospace & Defense ETF (NYSEArca:ITA) makes a great play for the second quarter and the rest of the year.
As its name implies, ITA owns a basket of aerospace and defense stock leaders. But what’s really awesome is that the ETF doesn’t just focus on giants like LMT and RTN. The ETF actually includes plenty of smaller and mid-sized defense contractors and hardware producers. These firms often only have a few product lines, so it makes them risky to own by themselves. After all, the ending of a government contract can spell doom for them. However, they do offer plenty of growth and capital appreciation as M&A targets or in a major contract win scenario.
By using ITA, investors can tap into their growth potential while still having plenty of exposure to the giants in the sector. And turns out to be a great place in the current market. ITA is still up over 4% as the S&P 500 has suffered.
Great ETFs for the Second Quarter: SPDR S&P Regional Banking ETF (KRE)
Expense Ratio: 0.44%
As the economy has improved, the Federal Reserve has continued to increase rates. That’s awesome news for the financial sector as banks are able to improve their net interest margins — basically the spread between what they charge for loans and how much they hand out for deposits.
But while big banks like J.P. Morgan (NYSE:JPM) will see some benefit from rising rates, the smaller regional banks could be the real winners. That’s because more of their earnings come from making loans, mortgages and other similar activities. Meanwhile, changes to banking regulations will benefit the smaller banks more than the larger ones.
To play these regional and mid-sized banks, the SPDR S&P Regional Banking ETF (NYSE:KRE)
KRE tracks 119 different banks. The beauty is that it is equally weighted. That means the super-regionals like Fifth-Third (NASDAQ:FITB) have the same pull on the index as smaller community banks. What that does is provide a more even picture and allows investors to get additional leverage from rising rates. Generally, the smaller the bank the more its profits are tied to making loans.
With rising loan activity, higher interest rates and less regulation now in their corner, the stocks in KRE should continue to benefit over the long haul.
Great ETFs for the Second Quarter: PIMCO Enhanced Short Maturity Active ETF (MINT)
Expense Ratio: 0.35%
Let’s call a spade a spade. There’s plenty of uncertainty these days in the market and the increase in volatility reflects that uncertainty. To that end, there’s no harm in taking some gains off the table and running to cash. And with the Fed increasing rates, cash is, even more, the king. To squeeze even more out cash, short-term duration ETFs like the PIMCO Enhanced Short Maturity Active ETF (NYSEARCA:MINT) make a ton of sense.
MINT is actively managed and holds a mixture of government and corporate short-duration investment grade bonds. These are bonds with maturities/durations of less than three years — with the bulk of the ETFs portfolio being under a year. This allows the fund to yield more than a savings account, but still offers plenty of rising rate protection. MIT will have no trouble rolling over its bonds to higher yielding ones as the Fed raises rates.
Meanwhile, the ETF has been rock-solid in terms of share prices. MINT has traded in a very tight share price range since its inception in 2009. Because of this, the ETF makes an ideal cash substitute. Meanwhile, trading volume of the fund is pretty swift and features low bid/ask spreads — making it even more cash like.
In the end, a strong defense might be the best offense in the second quarter and MINT is the ETF to own.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.