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Biggest ETF Stories of 2018 Worth Watching in 2019

Sweta Killa

After a blockbuster start to 2018, Wall Street has been caught in a vicious circle of trading with volatility and uncertainty taking center stage. While a combination of factors like surging corporate profits, booming growth and new tax legislation fueled a rally, inflation fears, surge in yields, tech selloff, concerns over slowdown in global growth and most specifically tariff tantrums weighed on stock returns (read: 5 Best Inverse Leveraged ETF Areas of 2018).

Below we discuss some of the events that dominated the headlines in 2018 and are worth watching in 2019:

Tariff Tantrums

Trade war fears initially surfaced in March when Trump levied a 25% tariff on steel and aluminum imports on countries around the world. The action prompted a retaliatory action from U.S. allies and tit-for-tat import tariffs. The turmoil intensified when Trump unveiled 25% tariff on Chinese goods worth $50 billion, 10% on $200 billion Chinese goods starting Sep 24 and threatened to add a third round of tariffs on another $267 billion of Chinese imports. All these led to retaliation from China and escalation in trade woes between the two countries, leading to threats of global slowdown.

While most of the ETFs suffered, semiconductor ETFs took a huge beating. Invesco Dynamic Semiconductors ETF PSI and VanEck Vectors Semiconductor ETF SMH tumbled the most, losing in double digits this year. Both the funds have a Zacks ETF Rank #3 (Hold).

However, in the latest Group of 20 meeting in Argentina, Trump agreed to halt new tariff for 90 days while China agreed to boost purchases of U.S. agricultural goods to reduce trade imbalance between the two countries. Further, both the United States and China kicked off a new round of trade talks, per the Wall Street Journal report. China is working to replace its Made in China 2025 plan with a new program promising greater access to foreign companies  (read: Trump-Jingping Truce to Boost These ETFs).

Fed Raises Rates, Offers Dovish View

The Fed has raised interest rates four times this year - March, June, December and September and trimmed its 2019 rate hike outlook from three to two in the latest FOMC meeting. While rate hikes boosted yields for most of this year, the dovish outlook will provide relief to Treasury bonds and rate sensitive ETFs.

As a result, investors’ should add some rate-sensitive high-yield sectors such as utilities and real estate for 2019. First Trust Utilities AlphaDEX Fund (FXU) having a Zacks ETF Rank #2 (Buy) seems an intriguing pick. Other utilities ETFs like Utilities Select Sector SPDR XLU, and Invesco DWA Utilities Momentum ETF PUI as well as real estate ETFs like Schwab US REIT ETF SCHH and iShares U.S. Real Estate ETF IYR also seem a good bet. All these products have a Zacks ETF Rank #3 (read: Utility ETFs Scale New Highs Amid Rising Volatility).

Tech’s Wild Swing  
The technology sector has experienced wild swings this year driven by trade woes, slew of negative news from many big names, slowing economic growth in China and fears of a global trade war. This has sent the hot and soaring segment, and the biggest driver of the nine-year bull run into red for the year with the S&P 500 Information Technology Sector Index declining about 3%. Amid the turbulence, Invesco Dynamic Software ETF PSJ and SPDR S&P Internet ETF XWEB emerged as winners, rising 15.5% and 12.1%, respectively. Both the products have a Zacks ETF Rank #2 (Buy).

Marijuana Rush

Like bitcoin in 2017, pot stocks made investors go on a mad rush this year as well. The enthusiasm was driven by Canada’s legalization of recreational marijuana effective Oct 17 that paved the way for a merger mania, spurring a large number of deal activities and a wave of weed stock IPOs. However, the stocks took a beating in the final quarter on profit taking and weak earnings from the cannabis producers. This pushed ETFMG Alternative Harvest ETF MJ — the first and only pure ETF targeting the cannabis/marijuana industry — lower by 24.3%, erasing all the gains made early in the year (read: 4 Reasons Why Pot Stocks & ETF Could Be on a High in 2019).

Oil’s Peak and Trough

Oil price resumed its downward trend in recent months after hitting the highest level since 2014. The ongoing trade tariff dispute between Washington and Beijing, weakening Eurozone growth and troubles in emerging market have sparked concerns over global economic growth. This is likely to weigh on oil demand.

As a result, stock-based energy ETFs like SPDR S&P Oil & Gas Equipment & Services ETF XES, VanEck Vectors Oil Services ETF OIH, Invesco S&P SmallCap Energy ETF PSCE and iShares U.S. Oil Equipment & Services ETF IEZ havelost more than 40% in 2018 so far. Futures-based energy ETFs like United States Oil Fund USO and United States Brent Oil Fund BNO have plunged 20% and 16.2%, respectively, this year.

However, the bearish trend is likely to reverse given fresh OPEC cuts and hopes of a trade deal, making beaten-down energy ETFs a solid investment opportunity for 2019. Additionally, the International Energy Agency projects that the global oil market could move into deficit sooner than expected, thanks to OPEC's output agreement with Russia and Canada's decision to cut supply (read: Is Fresh OPEC+ Output Cut Enough to Boost Oil & Energy ETFs?).

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