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Top ETF Stories of Q1 Worth a Watch in Q2

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The year 2022 as a whole could easily be attributed to the Russia-Ukraine war, hot inflation and rising-rate worries after an upbeat 2021. No wonder, such worries caused an upheaval in the market in the first quarter of 2022.

Wall Street witnessed its worst performance in Q1 in two years. The Dow Jones and the S&P 500 lost 4.6% and 4.9%, respectively, while the Nasdaq Composite Index shed 9% in the first quarter (read: U.S. Stocks Log Worst Q1 in 2 Years: Top-Ranked ETFs Shine).

Against this backdrop, below we highlight a few ETF stories of the first quarter that could hog investors’ attention in the second quarter too.

Russia-Ukraine War

As the Russia-Ukraine conflict (notably, both countries are commodity-rich) has sent prices for energy, grains, and metals surging, U.S. inflation is hovering around a 40-year high. It appears that higher inflation is not fleeting.As investing in commodities are the best practices in an inflationary environment, theSPDR S&P Metals & Mining ETF (XME - Free Report) and theSPDR S&P North American Natural Resources ETF (NANR - Free Report) have gained about 5% each past month. Both funds are up 40% and 34% this year, respectively. The trend should stay strong in the second quarter as well.

Fed Rate Hike; Inversion of Yield Curve?

The Federal Reserve raised interest rates by a quarter of a percentage point and projected that its policy rate would be in the range of 1.75% and 2% by the year's end in a newly aggressive stance to fight the red-hot inflation.

Hence, new Federal Reserve projections indicate six more rate hikes this year, per CNBC. The Fed downgraded its forecast for 2022 median real GDP growth from 4% in December to 2.8% for 2022. However, it kept the growth rate expectations same at 2.2% for 2023 and 2% for 2024.

Uncertainties and global growth worries sparked a safe-haven rally and dragged down long-term bond yields while Fed rate hike worries raised the short-term yields. According to MUFG Securities, the yield curve inverted 422 days ahead of the 2001 recession, 571 days ahead of the 2007-to-2009 recession and 163 days before the 2020 recession, as quoted on a CNBC article.

As a result, recessionary fears spared off. This makes safe-sector ETFs like Health Care Select Sector SPDR ETF (XLV - Free Report) and Vanguard Utilities Index Fund (VPU - Free Report) lucrative at the start of Q2 despite rate hike fears.

Gold to Glitter?

Uncertainties and rising inflation as well as low long-term rates are tailwinds for gold prices. As a result, SPDR Gold Trust ETF (GLD) emerged as one of the most-loved ETFs in Q1,hauling in $7.1 billion in its asset base. It tracks the price of gold bullion measured in U.S. dollars, and kept in London under the custody of HSBC Bank USA (read: 5 ETFs That Gained Investors' Love in Q1).

Foreign Dividend ETFs to Rule Again?

Several foreign ETFs offered better returns in Q1 than the S&P 500. Among them, dividend investing hogged special attention. Invesco International Dividend Achievers ETF (PID - Free Report) (up 8.1% and yields 2.80% annually), WisdomTree International High Dividend Fund (DTH - Free Report) (up 4.6% and yields 4.82% annually), Xtrackers MSCI EAFE High Dividend Yield Equity ETF (HDEF) (up 4% and yields 4% annually) and iShares International Select Dividend ETF (IDV) (up 3.52% and yields 5.51% annually) are some of the winning foreign funds of Q1. As several foreign central banks are rising rates, investors are probably turning into the high-dividend paying options. We expect the trend to stay strong in Q2.

Oil Price Rally

The coronavirus vaccine rollout is gradually helping to control the spread of the outbreak across the globe. This has been helping in economic reopening and boosting oil demand. Factors like easing Omicron variant concerns, supply shortages, and geopolitical tensions in Eastern Europe and the Middle East have thus boosted oil prices so far this year materially. WTI crude ETF United States Oil ETF (USO - Free Report) is up about 40% this year. If Russian tensions remain in place, a further rally should be in the cards.

Sector-Specific Investments to Rule

Apart from the energy sector, some sectors are expected to rule in Q2. These include materials, infrastructure, semiconductors and healthcare. So, investors can keep a tab on the likes of First Trust Materials AlphaDEX ETF (FXZ), iShares U.S. Infrastructure ETF (IFRA - Free Report) , Health Care Select Sector SPDR ETF (XLV - Free Report) and VanEck Semiconductor ETF (SMH).