Wall Street witnessed an upbeat December due to moderation in inflationary pressures, the likelihood of Fed rate cuts in 2024 and decent corporate earnings. All key U.S. equity gauges – the S&P 500, the Dow Jones, the Nasdaq and the Russell 2000 – gained by 1.8%, 1.6%, 2.2% and 4.20%, respectively in the past one month (as of Dec 27, 2023).

As far as rates are concerned, the benchmark treasury yield started the month at 4.22% and was at 3.79% at the end of Dec 26, 2023. Against this backdrop, below we highlight a few ETFs that have a Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy) and topped the performance list in the past one month. This means that these ETFs have further upside potential even after a stupendous rally in December.

ETFs in Focus

Consumer Discretionary

Invesco S&P SmallCap Consumer Discretionary ETF (PSCD Quick QuotePSCD - Free Report) ) – Zacks Rank #2 – Up 18.5% Past Month

SPDR S&P Retail ETF (XRT Quick QuoteXRT - Free Report) ) – Zacks Rank #2 – Up 15.6%

The Conference Board stated that its consumer confidence index increased to 110.7 this month from a up from a downwardly revised 101.0 in November. The Present Situation Index—based on consumers' assessment of current business and labor market conditions—rose to 148.5 from 136.5 last month.

The consumer confidence index advanced more than analysts’ expectations of 100.9. Confidence among consumers strengthened as they are now feeling much better about future business scenarios, income and job availability. The hopes for Fed rate cuts in 2024 made the matter even better (read: 5 ETFs to Ride High on Strong Holiday Retail Sales).

Small-Caps

JPMorgan BetaBuilders U.S. Small Cap Equity ETF (BBSC Quick QuoteBBSC - Free Report) – Zacks Rank #1 – Up 16.9% Past Month

Vanguard S&P Small-Cap 600 Value ETF (VIOV Quick QuoteVIOV - Free Report) – Zacks Rank #2 – Up 16.2%

 Small-cap stocks should rally ahead due to cheaper valuation, cooling inflation data and hopes of Fed rate cuts in 2024. Decent GDP growth momentum. A resilient consumer base also supports the rally in small-cap stocks. Apart from these, other factors are contributing to the rally in small-cap stocks. Per strategists, the valuation gap between large and small-cap companies, as well as private and public markets, suggests that merger and acquisition (M&A) activity may pick up. 

Cloud Computing

WisdomTree Cloud Computing ETF (WCLD Quick QuoteWCLD - Free Report) ) – Zacks Rank #1 – Up 16.5% Past Month

Cloud computing, a sector dominated by Amazon, Microsoft, and Alphabet, remains a promising area. The rise of generative AI is a tailwind for the cloud space. Global Cloud Computing Services market is expected to witness a CAGR of 8.4% during the forecast period 2023-2029, per Market Reports World.

Biotech

Invesco Nasdaq Biotechnology ETF (IBBQ Quick QuoteIBBQ - Free Report) ) – Zacks Rank #2 – Up 16.2% Past Month

iShares Biotechnology ETF (IBB Quick QuoteIBB - Free Report) ) – Zacks Rank #2 – Up 15.5%

The biotech sector has shown signs of recovery, with small caps and biotech stocks beginning to demonstrate strength. This recovery is partly driven by breakthroughs in fields like gene editing and immunotherapy, as well as a favorable industry outlook for 2024.

Innovations and successful drug trials have been key drivers in boosting investor confidence and stock prices in the sector. The sector has been seeing an increase in M&A activity. This is especially likely for biotech companies with pipeline assets in late-stage development, as they are attractive targets for acquisitions.

Semiconductor

SPDR S&P Semiconductor ETF (XSD Quick QuoteXSD - Free Report) – Zacks Rank #1 – Up 15.4%

Semiconductor stocks have surged this year, driven by the AI boom, as these companies provide vital components for AI development. Semiconductor ETFs have also been the best-performing ETFs of the last decade, with chips playing a crucial role in various products, from smartphones to data centers. With AI mania remaining strong, the chip space has every reason to outperform ahead.