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5 Winning ETF Strategies for Q4

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After a solid performance in Q3, the Wall Street continued to scale new highs to start the fourth quarter, dodging all economic and political ills. This indicates that the second-largest bull run still has legs (read: Leveraged ETFs to Play the Second-Largest Bull Market).

Strong corporate earnings and improving health of economies around the world are acting as tailwinds to the stock market. Additionally, stabilizing oil price, enthusiasm over tax reform and rounds of upbeat data are adding to the strength. Further, the Fed’s hawkish stance signals a strengthening economy, which will fuel further growth in the stock market (read: 6 ETFs Set to Win on Trump's Tax Reform).

Bull Remains Intact

After diverging in the past couple of months, the Dow Jones Transportation Average has caught up with the rally in the Dow Jones Industrial Average, indicating continued bullish trend as we head into the fourth quarter. According to the century-old Dow Theory, any long-lasting rally in Dow Jones Industrial should be accompanied by a rally in Dow Jones Transportation.  

If we go by history, the fourth quarter has often been kind to equities with the holiday months of November and December, when spending picks up. Per Sam Stovall, chief investment strategist at CFRA, history suggests that when the S&P 500 gains in August and September, often the worst months of the year, it typically rallies through the end of the fourth quarter for a 2% average gain. If this wasn’t enough, long-time bull finance professor, Jeremy Siegel, expects stocks to rally 10% in the last 101 days of the year courtesy of Trump effect, especially tax reforms.

Given this, we have highlighted some strategies that could prove extremely beneficial for investors for the fourth quarter:

Bet on Holiday-Friendly Sectors

Technology and consumer discretionary sectors are poised for outperformance, as these tend to enjoy seasonal tailwinds because of holiday spending. While these sectors are crowded with a number of top ranked ETFs, Select Sector SPDR Technology ETF (XLK - Free Report) , iShares PHLX Semiconductor ETF (SOXX - Free Report) , First Trust Dow Jones Internet Index (FDN - Free Report) , Vanguard Consumer Discretionary ETF (VCR - Free Report) , S&P SmallCap Consumer Discretionary Portfolio PSCD and SPDR S&P Retail ETF (XRT - Free Report) could make for compelling choices. All these have a Zacks ETF Rank #1 (Strong Buy) or 2 (Buy).

Make a Trump Play

Trump proposed the biggest U.S. tax overhaul in three decades that would make America more competitive. His plan calls for lowering the corporate tax rate from 35% to 20%, reducing the number of income tax brackets from seven to three with the top level rate being cut to 35%, cutting taxes for small businesses and doubling the size of Americans' standard deductions in a bid to bolster take-home pay for the middle class. Though the move is advantageous for all the market caps, small caps will be the biggest beneficiaries as they pay a median effective tax rate of 31.9% versus an average of 28% for the S&P 500 companies and 23.8% for the Dow Jones companies (read: Three Reasons to Bet on Small Cap ETFs Now).

While there are several options in this space that would gain from the proposal, a bunch of Zacks Rank #2 ETFs — Vanguard Russell 2000 Growth ETF VTWG, Guggenheim S&P SmallCap 600 Pure Growth ETF RZG, First Trust Small Cap Growth AlphaDEX Fund FYC, iShares Russell 2000 Growth ETF (IWO - Free Report) and iShares Morningstar Small-Cap Growth ETF JKK — are worth a look.

Go Global

While the U.S. stock market has been climbing, international investing is the real winner so far this year courtesy of cheap valuations and threats of political instability in the United States. The trend is likely to continue for the rest of the year and thus, investors should go global to take advantage of a surge in both domestic and international markets. This can easily be done through the ultra- popular funds — Vanguard Total World Stock ETF VT andiShares MSCI ACWI ETF (ACWI - Free Report) . Both have a Zacks ETF Rank #3 (Hold).

Tap Rising Rates

Treasury yields are on rise as 2-year Treasury yield hit the highest level since 2008 and the 10-year yield touched a three-month high. The upward push is expected to continue after the September job report showed a pickup in U.S. wage growth, suggesting that tight labor markets might finally drive inflation higher and bolster the case for rate hikes in December.

The best way to play the rising rates in the equity world is through the financial sector. This is because the steepening yield curve would bolster profits for banks, insurance companies, discount brokerage firms, and asset managers. Among the most interesting picks are Financial Select Sector SPDR Fund (XLF - Free Report) , Vanguard Financials ETF VFH and First Trust NASDAQ ABA Community Bank Index Fund QABA. All these funds have a Zacks ETF Rank #2 (read: Fed Reverses QE: Financial ETFs & Stocks to Buy).

For the fixed-income world, investing in floating rate notes, senior loans and negative duration bond ETFs make up for intriguing picks. Some of these are iShares Floating Rate Bond ETF (FLOT - Free Report) , PowerShares Senior Loan ETF (BKLN - Free Report) and WisdomTree Barclays U.S. Aggregate Bond Negative Duration Fund (AGND - Free Report) .

Safeguard Your Portfolio With Value Picks

Given that the market is at its peak, valuations are also stretched with the S&P 500 currently trading at a P/E of 24.70. As a result, investors can find quality picks in value ETFs that offer exposure to stocks having strong fundamentals — earnings, dividends, book value and cash flow — that trade below their intrinsic value and are undervalued. Among these, the most popular are iShares Russell 1000 Value ETF IWD, Vanguard Value ETF (VTV - Free Report) , iShares S&P 500 Value ETF IVE and Vanguard Small-Cap Value ETF VBR. These fund have a Zacks ETF Rank #3 (read: How to Use ETFs to Buy Value Stocks).

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