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Decorating a Christmas Tree of Top-Ranked ETFs

Sweta Killa

Christmas celebrations are incomplete without a verdant tree, a symbol of goodwill and love adorned with shining lights and silver bells. Given its significance in this season of joy, we have built a tree with the top-ranked ETFs that have the potential to outperform in 2020.

Let’s build the base first, which is the most valuable part, and of course the place where all gifts are to be found. There’s nothing more fitting than the broad market ETF SPDR S&P 500 SPY, which tracks the major U.S. benchmark — the S&P 500 Index — to give a solid foundation to our tree. The index has hit multiple highs lately and breached the milestone of 3,200, thanks to upbeat data, easing monetary policies, stronger-than-expected earnings and trade deal optimism. As such, SPY has returned more than 30% this year and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: A Bunch of Top-Ranked ETFs That Crushed the Market in 2019).

Most Exciting Areas of 2020

The bullish trend is likely to continue heading into the New Year given the phase-one trade deal between the United States and China as well as easing of Brexit tensions though elections. While most corners of the market are set to explode higher, sectors that are the most sensitive to trade issues like technology and industrial seem to be the biggest beneficiaries. In particular, chip stocks dominate the list of tech sector players with large sales exposure to China.

Therefore, an ETF from these two segments of the stock world could be the best option to deck up our Christmas tree. In particular, VanEck Vectors Semiconductor ETF SMH and Invesco DWA Industrials Momentum ETF PRN could be intriguing. Both the top-ranked funds are leading the way higher in their respective areas, gaining 64.7% and 34.8% in the year-to-date timeframe. The duo has a Zacks ETF Rank #2. These funds form the fronds and leaves of our ETF tree (read: Bull Market Rages On: Bet Big for 2020 With These ETFs).

For the top part of the tree, we have chosen growth ETF - Vanguard Mega Cap Growth ETF MGK – as growth investing is a momentum play and tends to outperform in a trending market (a market characterized by a prolonged uptrend). Growth stocks refer to high-quality stocks that are likely to witness revenue and earnings increase at a faster rate than the industry average. These stocks harness their momentum in earnings to create a positive bias in the market, resulting in rocketing share prices. MGK has climbed 36.8% this year and has a Zacks ETF Rank #1 (Strong Buy). So, growth ETFs seem excellent plays for investors seeking broad market exposure in 2020 (read: Bet on Growth Investing Now: Top-Ranked ETFs & Stocks).

Top ETF of 2019

At the very top is the star ETF of 2019 — Invesco Solar ETF TAN. The ETF has risen 65.4% so far this year and has a Zacks ETF Rank #2, which suggests that outperformance will continue. With AUM of $439.8 million, this ETF provides exposure to 22 solar stocks and charges 70 bps in annual fees (read: Top Performing ETFs of 2019).

Other Segments to Look for in 2020

With the structure ready, we now have to decorate the tree with bells, candies and lights. While most of the ETFs could be part of this beautification, we have chosen those that have a top Zacks ETF Rank or are currently hot in the market. Notably, SPDR S&P Biotech ETF XBI, offering equal-weight exposure to the biotechnology sector, will add to the glitter and shine. With AUM of $5 billion, the fund has 0.35% in expense ratio and gained 36.2% in the year-to-date timeframe. It has a Zacks ETF Rank #2. Biotech sector has been hot for most of the second half of 2019 on a series of positive news including study results, regulatory backdrop and deal activities. The trend is likely to continue in the next year as well (read: Will Biotech ETFs Excel in Election Year Post a Surge in 2019?).

The best ETF that could nicely fit the candy decor is iShares U.S. Home Construction ETF ITB, which has risen 48.2% this year and is likely to continue its uptrend in 2020. Showing a strong rebound, U.S. homebuilding has been the hottest of all the segments in 2019. The dual tailwinds of lower mortgage rates and slower home price growth are driving homebuilders higher (5 Best Stocks in the Hot Homebuilding ETF).

Now, to light up the tree, let’s add dividend ETFs like Vanguard Dividend Appreciation ETF VIG that will continue to brighten investors’ portfolio in 2020. Dividend products offer payouts and stability in the form of mature companies that are less susceptible to large swings in stock prices. Dividend-paying securities are major sources of consistent income for investors when returns from equity markets are at risk. With AUM of $42 billion and an expense ratio of 0.06%, VIG has a Zacks ETF Rank #1 (read: Safe-Haven ETFs Back in Demand on Trade Gyrations).

The Christmas tree of top-ranked ETFs to brighten 2020 is now ready for investors. May it spread cheer!