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ETF Areas Defying the Bear Market This Year: Can They Rally?

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

The S&P 500 finally entered into a bear market on Jun 13, while the Nasdaq entered that zone even before. The Dow Jones and the S&P 500 lost 17.8% and 22.9%, respectively, while the Nasdaq Composite Index and the Russell 2000 shed 30.9% and 25.8% in the first half. Talks are doing rounds that the U.S. economy will officially enter a recessionary phase.

Most market watchers and central banks have been caught off guard this year as nobody had predicted a bear market or recession. Back in December, strategists at JPMorgan Chase & Co. had predicted that the S&P 500 would rise 5% in 2022. Economists expected the U.S. 10-year Treasury yield to hit 2%, on average, by the year's end, per an article published on NDTV.

But the global market is in a critical juncture this year. The central banks (including the Fed) of the developed world opted for a faster policy tightening to fight scorching inflation (caused by the Russia-Ukraine war, China’s zero-COVID policy and the COVID-led supply chain woes). The Fed has hiked rates by 150 bps since March. The U.S. treasury yield curve inverted several times from late March. But the trend of bond yields has been quite volatile.

Notably, commodities had a great 1H as the escalation in tensions between Russia and Ukraine sparked a rally in a broad range of commodities. Both countries are commodity-rich, ranging from agriculture to minerals and energy products. The tensions have led to constrained supply concerns in an already-tight commodity market.

Against this backdrop, below we highlight a few ETFs that have a Zacks Rank #1 (Strong Buy) or 2 (Buy) and have won this year. Let’s see if they can rally further.

ETF Areas in Focus

Energy

Invesco Dynamic Energy Exploration & Production ETF (PXE - Free Report) and First Trust Natural Gas ETF (FCG - Free Report) added about 50% and 42% this year. Russia is also among the world’s largest suppliers of oil and natural gas. Pent-up demand and restrained production by the OPEC have caused a rally in energy prices. However, with recessionary fears taking the economies and markets in its grip, demand for energy may calm down in the coming months.

Agriculture

Teucrium Corn ETF (CORN - Free Report) (up 34.2%),iPath Series B Bloomberg Cotton Subindex Total Return ETN (BAL - Free Report) (up 33.4%) and iPath Series B Bloomberg Grains Subindex Total Return ETN (JJG - Free Report) (up 33%) have gained massively this year.

In particular, Russia and Ukraine are the major exporters of wheat, corn, edible oils and so on. As the conflict shows no signs of easing, Ukrainian farmers are finding it difficult to plant crops. Supply chain disruptions are some other concerns. This explains the rally in agricultural products.

We expect the segment to stay strong as demand for staples (or food) remains strong even if there is a recession or economic slowdown.  

Latin America

iShares MSCI Chile ETF (ECH - Free Report) (up 11.6%) and iShares MSCI Colombia ETF (ICOL - Free Report) (7.6%) are winners this year. The super-cycle of commodities and the spike in metal prices amid the war in East Europe have made another commodity-rich area, i.e., Latin America (especially countries like Chile and Peru) a winner (read: Latin America ETFs Breeze Past S&P 500 YTD: Here's Why).

Dividend

First Trust Morningstar Dividend Leaders ETF (FDL - Free Report) was up 1.6% in the past six months and the fund yields about 4.84% annually. Dividend ETFs act as great safety bets. Be it a bull or a bear market, investors mostly love dividend-paying stocks. After all, who doesn’t like a steady stream of current income along with capital appreciation?

Metals  

iPath Series B Bloomberg Nickel Subindex Total Return ETN (JJN - Free Report) (up 31.1%), iPath Series B Bloomberg Platinum Subindex Total Return ETN (PGM - Free Report) (up15.3%) and iPath Bloomberg Industrial Metals Subindex Total Return ETN (JJMTF) (up 13%) also staged an uptrend.

Russia is a great source of metals like aluminum, nickel and palladium. Plus, the ebbing pandemic boosted demand and consumption.