Back to top

Image: Bigstock

Filling ETFs in March Madness "Sweet 16" Brackets

Read MoreHide Full Article

The National Collegiate Athletic Association (NCAA) Division I Men's Basketball Tournament kicked off last week and is expected to continue for two more weeks. The champion will be crowned on Apr 4 at Caesars Superdome in New Orleans. The tournament works its way up from 64 college teams to ‘Sweet Sixteen’ to be played on Mar 24, followed by ‘Elite Eight’, ‘Final Four’ and ultimately the championship.
    
The basketball frenzy spills over to the stock market with various corners of the economy such as media, advertising, restaurants, hotels and airlines turning out to be the biggest beneficiaries. The excitement surrounding the tournament and its impact on the stock world has led investors to look at ETFs that could act as a proxy for the game. Since the tournament has reached Sweet Sixteen, let’s start filling the brackets from this level (read: 5 ETFs Set to Gain From March Madness Betting).
 
Similar to the four-region criteria of the real championship, we have chosen four factors, namely monetary policies, economy, fundamentals and investment strategies. Then, we have shortlisted 16 ETFs that are popular in the respective segments and fit our criteria. Fortunately, each of these funds has a Zacks ETF Rank making our seeding easier. In case of a tie between ranks, we have considered the year-to-date performance in selecting the ETF qualifying for the next round.

Monetary Policies

United States (VTI - Free Report) vs. Europe VGK — Currently, the United States and Europe are following a diverging monetary policy. The Federal Reserve in its latest meeting raised interest rates for the first time since 2018 by 25 bps to 1.25-0.50% and signaled hikes in all the six remaining meetings this year. Meanwhile, the European Central Bank is in no hurry to raise interest rates and will wait through the final quarter of the year for the first-rate hike in over a decade. VTI wins with a Zacks ETF Rank #2 (Buy) compared with a Zacks ETF Rank #3 (Hold) for VGK.

Winner: VTI

Gold (GLD - Free Report) vs. Dollar (UUP - Free Report) — Gold and dollar move in opposite directions and are largely influenced by monetary policies. While higher rates will pull in more capital into the country, leading to appreciation of the dollar, it diminishes the yellow metal’s attractiveness. UUP with a Zacks ETF Rank #2 has an edge over GLD’s Zacks ETF Rank #3.

Winner: UUP

Economy

U.S. Market (SPY) vs. International Market (VEU - Free Report) — Global market across the globe has been witnessing huge volatility this year triggered by a war in Ukraine, high inflation and rising interest rates. SPY wins with a Zacks ETF Rank #2 compared with a Zacks ETF Rank #3 for VEU.

Winner: SPY

Developed Market (VEA) vs. Emerging Market (EEM - Free Report) — Here VEA with a Zacks ETF Rank #3 has an edge over EEM’s Zacks ETF Rank #4 (Sell).

Winner: VEA

Fundamentals

Mega Cap (DIA - Free Report) vs. Small Cap (IWM - Free Report) — Wall Street is seeing tumultuous trading this year, with the major bourses in red so far. A war in Ukraine coupled with inflationary pressures has led to huge volatility and uncertainty in the stock market. DIA with a Zacks ETF Rank #1 (Strong Buy) has an edge over IWM’s Zacks ETF Rank #3 (read: Best ETF Areas YTD Amid Stocks' Fifth-Worst Start in 95 Years).

Winner: DIA

Value IWD vs. Growth (QQQ - Free Report) — Value stocks have been hogging investors’ attention amid market volatility as they are less susceptible to trending markets. Additionally, higher yields indicate investors’ optimism in the economy, thereby lifting value stocks. On the other hand, rising yields have been taken a toll on growth stocks. IWD wins with a Zacks ETF Rank #1 (Strong Buy) compared with a Zacks ETF Rank #2 for QQQ.

Winner: IWD

Investment Strategies

Low Volatility (USMV - Free Report) vs. Dividend (VIG - Free Report) — This year, the appeal for low volatility and dividend investing has been moving hand in hand. Heightened uncertainty has compelled investors to flock into low volatility products, while global economic slowdown, fueled by a war in Ukraine and another lockdown in China, is driving dividend investing. VIG wins with a Zacks ETF Rank #1 against the Zacks ETF Rank #2 for USMV.

Winner: VIG

Long-Term Treasury (TLT - Free Report) vs. High-Yield Bond (HYG - Free Report) — Soaring yields have pushed down Treasury ETFs, especially the long-term ones while raised the demand for high-yield bonds to shield against rising interest rates. Though TLT and HYG each have a Zacks ETF Rank #4 (Sell), the latter wins losing just 5.6% so far this year against a loss of 11.8% for TLT (read: Yields Hit Multi-Year Highs: Short Treasury With These ETFs).

Winner: HYG

Elite Eight (Mar 27)

Among the eight winning ETF teams, the six-month performance was used to decide the winner of each region.

Monetary Policies: United States vs. Dollar — UUP has emerged as the undisputed winner, gaining about 5% in the six months versus gain of 2% for VTI.

Economy: U.S. Market vs. Developed Market — SPY has risen about 3.5% over the past six months against a loss of 6.1% for VEA.

Fundamentals: Mega Cap vs. Growth — IWD outpaces DIA by nearly 350 bps.

Investment Strategies: Dividend vs. High-Yield Bond — VIG has risen about 2% over the past six months against a loss of 7% for HYG.

Final Four (Apr 2)

We come to the last four teams in this playoff tournament and the best in their specific regions. We now look at the trailing one-year performance to see who has the maximum momentum heading into the next level. In the matchups, we have Dollar versus U.S. Market on one side and Value versus Dividend on the other.

Invesco DB US Dollar Index Bullish Fund (UUP - Free Report) versus SPDR S&P 500 ETF Trust (SPY)

For this ETF faceoff, UUP represents Dollar and SPY stands for U.S. Markets. Let’s take a closer look at these funds before deciding on the winner:

UUP — Invesco DB US Dollar Index Bullish Fund is the prime beneficiary of a rising dollar as it offers exposure against a basket of six world currencies — euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. This is done by tracking the Deutsche Bank Long US Dollar Index Futures Index Excess Return plus the interest income from the fund’s holdings of U.S. Treasury securities.

Invesco DB US Dollar Index Bullish Fund has so far managed an asset base of $932.3 million while seeing an average daily volume of around 2 million shares. It charges 78 bps in total fees and expenses and has gained 6.3% over the trailing one-year period.

SPY — SPDR S&P 500 ETF Trust tracks the S&P 500 Index and holds 505 stocks in its basket, with each accounting for no more than 7% of assets. SPDR S&P 500 ETF Trust is heavy on the information technology sector while healthcare, consumer discretionary, financials and communication services round off the next four spots with a double-digit allocation each (read: 5 ETFs Up 20%+ in S&P 500's Best Week Since November 2020).

SPDR S&P 500 ETF Trust charges investors 9 bps in annual fees and trades in an average daily volume of 112 million shares. It has AUM of $408.3 billion and has surged 16.5% in a year.

Winner: U.S. Market ETF wins and advances toward the final round to take on the winner of the Value versus Dividend match.

iShares Russell 1000 Value ETF (IWD) vs. Vanguard Dividend Appreciation ETF (VIG - Free Report)

For this faceoff, IWD represents value and VIG represents dividend. Below, we take a closer look at these funds before picking the winner:

IWD — With AUM of $58 billion, iShares Russell 1000 Value ETF provides exposure to U.S. companies that are thought to be undervalued by the market relative to comparable companies and holds 850 stocks in its basket. The fund has key holdings in the financials, healthcare and industrials sectors.

iShares Russell 1000 Value ETF charges 19 bps in fees per year from investors and trades in heavy volume of around 4.4 million shares a day on average. The ETF is up 11.7% in a year.

VIG — Vanguard Dividend Appreciation ETF is the largest and the most popular ETF in the dividend space with AUM of $67.3 billion and an average daily volume of 2 million shares. The fund follows the S&P U.S. Dividend Growers Index, which is composed of high-quality stocks that have a record of increasing dividends over time. Vanguard Dividend Appreciation ETF holds 267 securities in the basket with none accounting for more than 4.7% share.

Vanguard Dividend Appreciation ETF charges 6 bps in annual fees and has gained 13.9% in a year.

Winner: Dividend ETF wins to compete with U.S. Market ETF for the championship.

The National Championship (Apr 4)

For the championship, let’s look at the performance of both ETFs over the past five years. SPY has gained nearly 105% compared with 94% gain for VIG. This suggests that in the ETF world, SPDR S&P 500 ETF Trust (SPY) will likely emerge as the winner of the 2022 March Madness championship based on our ranking system and its recent performance.