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Top Sectors of Q3 and Their Best ETFs

Sweta Killa

Amid bouts of volatility, Q3 was smooth for the U.S. stock market especially in July and August, as the three major indices hit new all-time highs on several occasions. The rally came on the back of better-than-expected earnings reports, higher oil prices and a more accommodative Fed monetary policy.

However, renewed fears of a rate hike and high probability of the Republican candidate, Donald Trump, being a president ahead of the first faceoff rattled the markets in September. Despite this, the S&P 500, Dow Jones, and Nasdaq are up 3.4%, 2.3% and 9.8%, respectively, in Q3 (read: Beat the Market with These High Dividend ETFs & Stocks).  

Though there have been winners in many corner of the space, a few sectors have easily crushed the broad market in the third quarter. Below, we discuss the reasons of the outperformance of these sectors and highlighted their best performing ETFs. These sector funds could be better plays toward the end of the year:

Biotech of Healthcare

The biotech sector has been the star performer given better earnings, hopes of increased M&A activity and an accelerated pace of innovation, though regulatory scrutiny and political uncertainty remained as headwinds. Though biotech ETFs led the way, BioShares Biotechnology Clinical Trials Fund (BBC) is the clearest winner, gaining in 29.6% (read: Biotech ETFs in Focus on Tobira Therapeutics' Massive Gain).

This ETF has a novel approach to biotechnology investing as it provides exposure to companies that are in the clinical trials stage by tracking the LifeSci Biotechnology Clinical Trials Index. Holding 77 stocks in its basket, the fund is widely spread out as each firm holds less than 3.3% share. The fund has accumulated $23.3 million in its asset base and charges a higher annual fee of 85 bps per year. It trades in a light volume of 13,000 shares a day and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a High risk outlook.

Coal of Mining

Thanks to the rebound in the industry fundamentals and the developments in China, coal continued to shine this year. In particular, China implemented a five-day working week for domestic mines and also curtailed its production in an effort to ease an oversupplied market that are providing strong support to the coal prices. As a result, the only ETF targeting the global coal industry – VanEck Vectors Coal ETF KOL – has seen smooth trading rising 25.6% in Q3.

It tracks the MVIS Global Coal Index. Holding 29 securities in the basket, the fund is pretty well spread across each component with none holding more than 8.8% share. It has a Chinese focus accounting for one-fourth of the portfolio while Australia, the U.S. and Canada round off the next three. The fund has amassed $86.3 million in its asset base and trades in average daily volume of about 94,000 shares. Expense ratio comes in at 0.59%. KOL has a Zacks ETF Rank of 4 or ‘Sell’ rating with a High risk outlook (read: Top and Flop Sector ETFs YTD).

Networking of Technology

The technology sector has been on a tear in the third quarter on improving fundamentals, a string of solid earnings reports, investors’ drive for cheaper valuation and renewed focus on beaten down growth stocks that has sent stock prices higher. PowerShares Dynamic Networking Portfolio (PXQ) is the top performer in this space, having returned 22.6% in the quarter.

This product targets the networking segment of the broad U.S. technology sector by tracking the Dynamic Networking Intellidex Index. Holding 30 securities in its basket, the fund is well spread across each component as each security accounts for less than 5% share. From an industrial look, about half of the portfolio is focused on communication equipment followed by 30% in software and programming. The fund is unpopular and illiquid in the broad tech space with AUM of $24 million and average daily volume of about 4,000 shares. It charges 63 bps in annual fees and has a Zacks ETF Rank of 1 or ‘Strong Buy’ with a High risk outlook (read: 4 Best ETFs & Stocks to Tap the Tech Boom).

Gaming of Consumer Discretionary

The battered global gaming industry got a fresh lease of life from the recovering casino business in Macau – the world’s largest casino gaming destination as well as stronger earnings reports. This has resulted in a gain of 14.7% for VanEck Vectors Gaming ETF BJK, which is the lone ETF providing investors’ global exposure to the casino gaming market.

This product follows the MVIS Global Gaming Index, holding 41 securities in its basket. It is moderately concentrated across components with each holding less than 8.5% of assets. In terms of country exposure, U.S. takes the top spot at 34.9%, followed by Australia (15.8%) and China (8.7%). It has often been overlooked by investors as depicted by AUM of $19.8 million and average daily volume of roughly 5,000 shares. This ensures additional cost in the form of wide bid/ask spread beyond the expense ratio of 0.65%.

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