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Market Beating Sector ETFs of 2014's First Half

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The U.S. stock market started 2014 on a soft note due to fragile weather that stalled the ongoing recovery in the first quarter. To add to that, uneven economic growth, uncertainty over the Fed policy, weak corporate earnings, lofty valuations, slowdown in China and geopolitical tensions in Russia continued to weigh on the stocks.

However, these concerns slowly and gradually eased in the latter part of the first half as economic activity picked up significantly with an improvement in weather. The job market has also improved considerably and so has the housing market. Growing manufacturing and service sector, increasing consumer confidence, rising corporate deals and low interest rates have also fueled optimism in the economy, thus pushing up the stock market (read: 3 ETFs Hitting All-time Highs in Rocky Market).

Further, the Fed’s commitment to keep the interest rates lower for a considerable period of time even after the QE wrap-up propelled the stocks higher. The global economy is also showing signs of improvement driven by encouraging manufacturing data from China and Japan. Moreover, the yields on 10-year Treasuries have reached their lows boosting the appeal for riskier assets.

As a result, investors continue to invest their money into the global equity markets via ETFs, resulting in strong inflows of over $49 billion, which accounts for two-thirds of AUM accumulated in the first half. The S&P 500 jumped 6.1% while Dow rose 1.5%. The Nasdaq also climbed 5.5%.

While there have been winners in every corner of the space, a few sectors have easily crushed the broad market in the year-to-date period. Below, we have highlighted three sectors and the related ETFs that have been the star performers in the first half and could be better plays as we move into the second half of the year (see: all the Categories ETF here).

Energy ETFs

The space has been benefiting from growing tensions in Russia and escalating violence in Iraq. The instability in these two nations has ignited fears of oil supply disruption, leading to higher prices of oil and the energy stocks. Rising global demand and supply crunch in other countries like Libya and Nigeria further shot up prices.

Meanwhile, a number of energy ETFs have gained over 20% so far this year. Some of them are Global X MLP & Energy Infrastructure ETF (MLPX), Market Vectors Unconventional Oil & Gas ETF (FRAK), SPDR S&P Oil & Gas Exploration & Production ETF ((XOP - Free Report) ), iShares U.S. Oil Equipment & Services ETF (IEZ) and Market Vectors Oil Services ETF ((OIH - Free Report) ).

Among these, OIH and XOP are one of the popular choices in the energy space with AUM of $1.5 billion and 1.3 billion, respectively. OIH provides exposure to the oil service firms by tracking the Market Vectors US Listed Oil Services 25 Index while XOP follows the S&P Oil & Gas Exploration & Production Select Industry Index and targets the oil and gas exploration segment. Both the products charge 35 bps in fees per year and have a Zacks ETF Rank of 4 or ‘Sell’ rating (read: 3 Energy ETFs to Watch on Iraq Turmoil).

Semiconductor ETFs

The technology sector has seen rough trading for most of the first half on growing concerns over valuation and future earnings growth. Investors have fled from the high growth
Internet and social media stocks in favor of value-centric traditional areas like semiconductors. This rotation has resulted in solid performance of the semiconductor space.

The SPDR S&P Semiconductor ETF ((XSD - Free Report) ) is the top performer in this space, returning more than 23% in the first half of the year. It is followed by PowerShares Dynamic Semiconductors Fund ((PSI - Free Report) ) and iShares PHLX Semiconductor ETF ((SOXX - Free Report) ) with more than 19% gain. XSD puts more on small cap securities, which enables it to climb higher than the other two products (read: A Comprehensive Guide to Semiconductor Industry ETFs).

XSD tracks the S&P Semiconductor Select Industry Index and holds 51 stocks in its portfolio. The product provides huge diversification benefits across each security as none of them allocates more than 2.6% of the assets. The fund has accumulated $163.9 million in AUM and charges 35 bps in fees per year. The product has a Zacks ETF Rank of 3 or ‘Hold’ rating.

Utilities ETFs

Thanks to the series of anxieties that plagued the U.S. market in the first half, investors became defensive and sought safety by stuffing Utilities in their portfolio. Utility stocks pay outsized yields to investors and often act as a safe haven amid market turmoil (read: 3 Sector ETFs for This Shaky Market).

The sector is also benefiting from an ever-expanding population, which is fueling the demand for utility supplies like water, gas and electricity. In addition, lower interest rates in spite of the Fed tapering of stimulus are contributing to growth. While a number of utilities ETFs have provided impressive returns, Guggenheim S&P 500 Equal Weight Utilities ETF ((RYU - Free Report) ) is leading the sector with returns of over 19% so far this year.

This ETF provides exposure to 35 utilities stocks with equal weight methodology by tracking the S&P 500 Equal Weight Index Utilities. The fund has amassed $177.7 million in its asset base and charges 0.40% in expense ratio. The ETF has a Zacks ETF Rank of 5 or ‘Strong Sell’ rating.

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