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Play the Market Rally with These ETFs

Zacks Equity Research

After embarking on a soft 2014 following a run of weak data points, the U.S. markets once again picked up, sending the S&P 500 to record highs and the NASDAQ to 14-year highs. Despite initial volatility in the indices, investors seem convinced about the continuation of U.S. economic growth. The axe on QE stimulus is also giving cues of sustained economic recovery.

From a value point of view also, the market is perceived as compelling by many analysts with rich corporate cash balances.  Though a slew of recent economic data fell shy of expectations, a severe winter has taken the major share of the blame rather than deteriorating fundamentals. Economic growth is also expected to resume in the second half of the year.

In the mean time, jobless data came in favor of economic growth hitting the 5-year low in January, though the pace of job creation remained muted for two months in a row. News on the earnings front was reassuring for investors, with more companies beating earnings and revenue expectations thanks to easier comps.

Merger and acquisition activities are also picking up in the market speaking of the underlying cash strength of the big corporates.

To add to the slowly building optimism, new home sales numbers hit a five-and-a-half year high in January and a bunch of retailers came up with impressive earnings and guidance, lately.  All these have strengthened investors’ sentiment which in turn pushed up the markets despite a host of mixed-bag data (read: Homebuilder ETFs Rise on Solid Earnings, Strong Home Prices).  

Amid such a backdrop, investors might be willing to bet their dollars on some growth ETFs and take part of this rally. Below we have highlighted some prudent choices targeting growth investing style which may be perfect for investors seeking a higher beta way to play this rally:

Guggenheim S&P 500 Pure Growth ETF (RPG)
 
Launched in March of 2006, RPG seeks to deliver the return of the S&P 500 Pure Growth Index. So far, RPG amassed an asset base of $1.3 billion. From an individual holdings point of view, the fund holds 107 stocks in a less concentrated approach. Its top holding accounts for 2.12% of the portfolio.  Hot stocks like Tripadvisor, Netflix and Facebook are some of its top holdings.
 
The fund predominantly invests in Consumer Discretionary (29.48%), Healthcare (16.31%) and Information Technology (15.57%) sectors. Investors should note that all three sectors have high upside potential this year and in the next in terms of earnings and revenues growth (read: Time to Bet on This Small Cap Consumer ETF).
 
The fund charges a low expense ratio of 35 bps a year. RPG added about 6.15% so far this year (as of February 26, 2014) and currently has a Zacks ETF Rank #1 (Strong Buy) with ‘medium’ risk outlook.
 
First Trust NASDAQ-100 Equal Weighted Index Fund (QQEW)

Launched in April 2006, QQEW looks to replicate the performance of the NASDAQ-100 Equal Weighted index. This benchmark index provides exposure mostly to the largest domestic, and to some extent, international companies holding each stock in an equal-weighted fashion. Resting solely on growth stocks, the fund charges 60 bps in annual fees.
 
The fund invests $497.4 million of assets in 101 stocks. No stock accounts for more than 1.61% of the basket. QQEW appears to be heavily invested in the Technology sector with 40.23% of investment, followed by 26.64% in Consumer Services and 13.5% in Health Care.
 
Notably, technology was the second best performing sectors in terms of beat ratios this earnings season, as per the Zacks earnings trend (read: Top Ranked Technology ETF in Focus: QTEC).
 
QQEW gained 5.36% year to date. The fund presently carries a Zacks ETF Rank # 1 (Strong Buy) with ‘medium’ risk outlook.
 
First Trust NASDAQ-100 Ex-Technology Sector Index Fund (QQXT)
 
Making its debut in February 2007, QQXT looks to track the NASDAQ-100 Ex-Tech Sector Index. This is also an equal-weighted index offering investors a way to access the NASDAQ 100 Index without having technology exposure as well as the larger NASDAQ Index excluding the financial exposure. QQXT charges the same 60 basis point fee as QQEW.
 
The fund invests its small asset base of $98.3 million in 61 holdings with no stock occupying more than 2.70% of the portfolio. Consumer services sector takes up the top spot here with 44.49% focus followed by healthcare (22.56%) and industrials (13.75%).
 
QQXT returned 4.66% year to date and currently carries a Zacks ETF Rank #2 (Buy) with ‘medium” risk outlook (read: Healthcare Boom Brings This Sector ETF in Focus).
 

 
Bottom Line

As one can see in the above chart, the aforementioned funds have breezed past SPY (which targets the S&P 500 index) over the last three months, braving the initiation of QE taper, emerging market sell-off, downbeat economic indicators and the worst winter seen in at least a decade.

Meanwhile, the IMF also lifted its global growth forecast for the first time in nearly two years reflecting rising demand from developed nations. So, investors can easily ride out the recent rally through the above-said growth ETFs till spring brings the true picture of U.S. economic recovery back into focus.

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Read the analyst report on RPG

Read the analyst report on QQEW

Read the analyst report on QQXT


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