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A Look at the Christmas Tree of Top-Ranked ETFs

Sweta Killa
Philip Morris' (PM) Q2 results gain from growth in heated tobacco units and favorable pricing. However, decline in cigarette shipment volumes were a drag.

Christmas celebrations are incomplete without the traditional 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 2019.

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’s 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 is on the brink of a bear market, losing 18% from its peak early this year, triggered by myriad woes ranging from U.S.-China trade tension to global growth concerns. The partial government shutdown added to the woes.

However, the beaten down price is a solid attractive entry point for investors, given an improving economy and the Fed’s dovish outlook, which will keep rates under control for 2019. The American economy is on track this year to expand at the fastest pace in 13 years, thanks to robust job creation, strong GDP growth, a 50-year low unemployment rate, solid wage gains, as well as rising consumer and business confidence. This would provide a boost to the broad market and SPY, which has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: 5 ETFs Up At Least 10% in Tumultuous Q4).

The volatility is expected to spill into the New Year, given no signs of progress in the U.S-China 90-day trade truce, slowing Chinese economy, deteriorating growth in Japan and Europe, as well as troubles in emerging markets. Further, the flattening yield curve (a phenomenon in which longer-dated debt yields fall faster than their shorter-dated counterparts) has sparked fears of recession.

Amid such uncertainty, utilities sector is expected to see continued surge. First Trust Utilities AlphaDEX Fund FXU having a Zacks ETF Rank #2 could be a potential winner. This product follows the StrataQuant Utilities Index, holding 35 securities in its basket with each accounting for no more than 6.2% of the total assets. The fund has accumulated $393.7 million in its asset base and charges 62 bps in annual fees. It is up 6.6% so far this year (read: Utility ETFs Scale New Highs Amid Rising Volatility).

Healthcare, which generally outperforms during periods of low growth and high uncertainty, garnered investors’ interest due its non-cyclical nature this year. This is because the demand for healthcare services remains intact even amid deteriorating economic fundamentals. While most of the ETFs in this sector are expected to shine, iShares U.S. Medical Devices ETF IHI seems an intriguing choice. The fund provides exposure to U.S. companies that manufacture and distribute medical devices by tracking the Dow Jones U.S. Select Medical Equipment Index. It holds 57 securities in its basket and has managed assets worth $2.5 billion. The ETF charges 43 bps in fees per year and has a Zacks ETF Rank #1 (Strong Buy). It has gained nearly 9% so far this year (read: Top Sector ETFs of 2018).

For the top part of the tree, we have chosen mid-cap iShares Core S&P Mid-Cap ETF IJH as investors seek to participate in the growing economy but are worried about uncertainty. While large companies are normally known for stability and the smaller ones for growth, mid-caps offer the best of both the worlds, offering growth and stability simultaneously. These middle-of-the-road securities are arguably safer options and have the potential to move higher in turbulent times, especially if political issues or financial instability creeps into the picture. IJH has shed 14.1% so far this year and has a Zacks ETF Rank #2.

At the very top is the star ETF of 2018 — Invesco Dynamic Software ETF PSJ. The ETF has risen 9.4% so far this year and has a Zacks ETF Rank #2, which suggests that outperformance will continue. With AUM of $246.6 million, this ETF provides exposure to 30 software segments of the broader U.S. technology space and charges 63 bps in annual fees.

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 offer stability amid market turbulence. Notably, the ultra-popular Vanguard Dividend Appreciation ETF VIG, with AUM of $27.8 billion, follows the Nasdaq US Dividend Achievers Select Index. The benchmark is composed of high-quality stocks that have a record of raising dividends every year. It holds 182 securities in the basket and charges 8 bps in annual fees. The product has a Zacks ETF Rank #1 and has shed 5.3% in the year-to-date timeframe (read: 4 Recession-Proof ETFs to Buy Right Away).

Dividend paying securities are the major source of consistent income for investors to create wealth when returns from the equity market are at risk. Dividend-focused products offer safety in the form of payouts while at the same time providing stability as mature companies are less volatile to large swings in stock prices. This is because the companies that pay dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis.

The best ETF that could nicely fit the candy decor is Market Vectors Gold Mining ETF GDX, which is crushing the market rout this quarter, climbing nearly 11% and is likely to continue its uptrend in 2019. This is because the stock market rout brought back the allure for the metal, boosting its demand. Notably, the bullion acts as a store of value and hedge against market turmoil (read: Gold Mining Crushing the Market: Best ETFs & Stocks of Q4).

Now, to light up the tree, let’s add value ETFs like Vanguard Value ETF VTV that will continue to brighten investors’ portfolio in 2019. Value products seek to capitalize on inefficiencies in the market and have the potential to deliver higher returns with lower volatility compared with growth and blend counterparts. Additionally, these are less susceptible to trending markets and their dividend payments offer safety in times of market turbulence. With AUM of $40.5 billion and an expense ratio of 0.05%, VTV has a Zacks ETF Rank #1 (read: No Sign of Santa Rally: Buy These Top-Ranked Value ETFs).

The Christmas tree of top-ranked ETFs is now ready for investors. May it spread cheer this holiday season.  

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