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6 Biggest ETF Stories of 2016 Worth Watching in 2017

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The year 2016 was marked with heightened volatility and was full of surprises for the U.S. stock market. This is especially true as U.S. stocks saw an uneven ride from a trough in mid-February on oil price crash and China devaluation to a peak in late December fueled by Trump and impressive comeback in oil prices.

Several events that impacted the ETF world in either a positive or a negative way are worth watching in 2017 as well. Below are some of the major events that hit the headlines for longer than expected:

Trump Rally

The unexpected victory of President-elect Trump has made broad market sentiments extremely bullish sending U.S. stocks to new highs several times after the election. In fact, the Dow Jones Industrial Average is on the way to hit the major 20,000 milestone (read: Inside the 5 Top Performing Stocks of the Dow ETF).

Trump has promised to accelerate economic growth, spend big time on infrastructure, reduce regulations, cut taxes and create more jobs in the country that will likely flood companies with excess cash and earnings growth. It will also lead to a wave of buybacks, and mergers and acquisitions. In particular, the industrials and materials sectors will remain the biggest beneficiaries of Trump’s policies in 2017. First Trust RBA American Industrial Renaissance ETF AIRR and PowerShares S&P SmallCap Materials Fund (PSCM - Free Report) were the biggest winners, gaining 44.5% and 53.4%, respectively, in 2016. AIRR has a Zacks ETF Rank of 2 or ‘Buy’ rating while PSCM has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating.

Fed Hawkish Move

At the FOMC meeting in December, the Fed raised interest rates for the second time in a decade by a quarter percentage points to 0.50% to 0.75% from 0.25% to 0.50%. Pickup in economic growth since the middle of the year, substantial increase in inflation, and a nine-year low unemployment level were cited as the reasons for the rate hike. The central bank further signaled a faster pace of rate increase this year given President-elect Donald Trump’s tax cut proposals, increased infrastructure spending plans and deregulations. The Fed now expects three lift-offs in 2017, two or more in 2018 and three in 2019 (read: How to Profit from Rising Rates with ETFs).

As a result, cyclical sectors like financials, technology, industrials, and consumer discretionary are expected to benefit from a rising rates environment. Some of the top-ranked ETFs in these spaces are SPDR S&P Regional Banking ETF (KRE - Free Report) , PowerShares S&P SmallCap Financials Portfolio PSCF, Select Sector SPDR Technology ETF (XLK - Free Report) , First Trust Industrials/Producer Durables AlphaDEX Fund FXR and Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report) . All these funds have a Zacks ETF Rank of 1 or 2, suggesting their outperformance in the coming months.

Brexit

On June 23, Britons voted in favor of leaving the EU with the ‘leave’ camp gaining 51.9% support, triggering a global sell-off initially, and pushing British pound to a new 31-year low. Britain also lost its top AAA credit rating after the vote. However, the economy seems to have overcome the shock of the Brexit vote and the stocks have recovered from a dramatic slump with both the FTSE 100 and the broader FTSE 250 index trading higher than before the referendum. Notably, Britain’s exit from the EU will begin in March (read: UK Economy Continues to Grow Despite Brexit: ETFs in Focus).

As a result, currency hedged ETFs like iShares Currency Hedged MSCI United Kingdom ETF HEWU and WisdomTree United Kingdom Hedged Equity ETF surged 17.7% and 21%, respectively, as a crash in British pound makes this investing strategy appealing. The ultra-popular iShares MSCI United Kingdom ETF EWU lost 1.2% in 2016 while Guggenheim CurrencyShares British Pound Sterling Trust ETF (FXB - Free Report) was down 16.7%. All the four funds currently have a Zacks ETF Rank of 3 or ‘Hold’ rating.

Bear-to-Bull Run of Oil

The energy segment was on a roller coaster ride last year, with oil touching 12-year lows in mid February and then spiraling back to the above $50-per barrel mark. In fact, oil prices saw the biggest annual gains in seven years with Brent and WTI rising 52% and 45%, respectively, primarily driven by the OPEC output cut deal. In particular, stock-based energy ETFs like VanEck Vectors Unconventional Oil & Gas ETF (FRAK - Free Report) ,SPDR S&P Oil & Gas Exploration & Production ETF (XOP - Free Report) and PowerShares S&P SmallCap Energy Fund (PSCE - Free Report) climbed 37% each in 2016. Futures-based energy ETFs like United States Oil Fund (USO - Free Report) and United States Brent Oil Fund (BNO - Free Report) gained 6.5% and 28%, respectively.

The bullish trend will likely continue as the OPEC will reduce production by 1.2 million barrels per day for six months starting in January 2017 that would rebalance the oil market in the short term. FRAK and XOP have a Zacks ETF Rank of 3 while PSCE has a Zacks Rank of 4 or ‘Sell’ rating (read: How to Bet on Oil with Leveraged ETFs).

2016: A Trump Card for Mining Sector

The mining sector got a bump from rebounding commodity prices, positive developments in China, pick-up in global manufacturing activities and improving global trends. Additionally, Trump’s pro-growth policies to revive U.S. manufacturing and rehabilitate the country’s aging infrastructure added to its strength. The President-elect has proposed to spend a trillion dollars on infrastructure by rebuilding highways, bridges, hospitals and other infrastructure projects over 10 years.

That being said, PureFunds ISE Junior Silver ETF SILJ topped the list of the best-performing ETFs of 2016, gaining about 140%. This was followed by gains of 106% for SPDR S&P Metals & Mining ETF XME and 95.8% for VanEck Vectors Steel ETF (SLX - Free Report) (read: Top Mining ETFs & Stocks of 2016: The Best from a Winner).

Bitter End for Bonds

Bonds saw tremendous rally in the first half buoyed by the devaluation of Chinese currency Yuan, heightened worries about the global economy, and Brexit concerns. But the story saw a twist in the past few months when encouraging data infused optimism about stronger growth, higher inflation and a faster pace of Fed rate hike. As a result, the overall Treasury bond market logged the second consecutive year of price declines for the nearly $14 trillion market. As a result, the ultra-popular iShares Core U.S. Aggregate Bond ETF AGG and Vanguard Total Bond Market ETF BND were up 1.4% and 2.5%, respectively (read: Is the Treasury Bond ETF Rally Over?).

Bottom Line

Investors should closely watch the developments in these spaces as we head into the next year and should tap opportunities as and when they come.

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