The year 2017 is underscored by an aging eight-year bull run, which still has legs. Several events led to the rally in the stock market and impacted the ETF world in either a positive or a negative way. Below are some of the major events that hit the headlines for longer than expected and are worth watching in 2018:
After a huge battle, President Donald Trump finally signed a massive $1.5-trillion tax cut bill to end 2017. This will likely create an economic surge, boosting job growth and reflation trade. It will further accelerate earnings, leading to increased dividend and buyback activities and paving the way for increased mergers and acquisitions.
While many corners of the market will enjoy a huge rally, small caps will likely be the biggest beneficiary of the trend in 2018 as these pay huge amounts in corporate tax. As such, iShares Morningstar Small-Cap Growth ETF JKK stole the show in this space gaining 24.4% this year, followed by gains of 23.5% for First Trust Small Cap Growth AlphaDEX Fund FYC and 22.7% for iShares Russell 2000 Growth ETF (IWO - Free Report) . These funds have a Zacks ETF Rank #2 (Buy) (read: Top-Ranked ETFs That Crushed the Russell 2000 Post Election).
Among the S&P 500 sectors, financials will gain most from reduced tax rates and a shift to the territorial system. The tax reform may also cause a rise in interest rates that would expand net margins and bolster banks’ profits. That said, Financial Select Sector SPDR Fund (XLF - Free Report) is up 22.2% and will likely continue its strong performance given that it has a Zacks ETF Rank #2.
Dow & S&P 500 Sets New Milestones
The Dow Jones Industrial Average was the biggest beneficiary of the rotation in leadership in the large-cap domestic space. The index climbed 25%, marking the best annual performance since 2013, and has moved up 5,000-points this year — the biggest annual gain in its history. Additionally, it has logged in the highest-ever number of record closes in 2017. On the other hand, the S&P 500 is also poised for its best year since 2013 having risen 20%. The index hit successive milestones of 2,300 in January, 2,400 in May, 2,500 in September and finally 2,600 in November (read: Dow Tops 24,000: 5 Best Stocks Powering ETF).
Strong corporate profits and accelerating economic growth across the globe were the major catalyst throughout the year. Additionally, Trump’s tax reform strengthened the rally in the second half. Rise in oil price and higher interest rates are fueling further growth. Given this, the second largest bull run is expected to continue in 2018. Investors could ride out the trend with leveraged ETFs like Direxion Daily S&P 500 Bull 3x Shares (SPXL - Free Report) and ProShares UltraPro Dow30 UDOW. The former offers three times exposure to the S&P 500 index while the latter provides three times returns of the Dow Jones Industrial Average.
At the FOMC meeting in December, the Fed raised interest rates for the third time this year by a quarter percentage points to 1.25-1.50%, confirming the U.S. economy’s growth momentum and the labor market’s well-being. The central bank penciled three rate hikes in 2018, which will be undertaken by the chairmanship of Jerome Powel. It will also shrink its $4.2-trillion balance sheet and intends to gradually speed up the process (read: ETF Winners & Losers Post Partly Dovish Fed Meet).
As a result, 2018 seems to be the year for cyclical sectors like financials, technology, industrials, and consumer discretionary that are expected to benefit from a rising rates environment. Some of the top-ranked ETFs in these spaces are Vanguard Financials ETF VFH, Select Sector SPDR Technology ETF (XLK - Free Report) , First Trust Industrials/Producer Durables AlphaDEX Fund FXR and PowerShares S&P SmallCap Consumer Discretionary Portfolio PSCD. All these funds have a Zacks ETF Rank #1 (Strong Buy) or 2, suggesting their outperformance in the coming months.
Bitcoin has been the hottest volatile trade of 2017, climbing to a record high of more than $19,000 from less than $1,000 at the start of the year. Most of the rally was driven by rising institutional investor interest and the excitement surrounding the launch of futures contracts, which made cryptocurrency easily available to individuals and businesses for the first time, leading to increased investment in the booming cryptocurrency with a growing number of retail investors.
The Chicago Board Options Exchange (CBOE) launched bitcoin futures on Dec 10 while Chicago Mercantile Exchange (CME) started trading bitcoin futures contracts on Dec 18. This has led to renewed interest to create ETFs tied to the digital currency. Most of the issuers refiled their applications for futures-based bitcoin ETFs. Some of these are REX Bitcoin Strategy ETF, REX Short Bitcoin Strategy ETF, VanEck Vectors Bitcoin Strategy ETF, ProShares Bitcoin ETF, and ProShares Short Bitcoin ETF. Additionally, the bitcoin boom has attracted new filings too this month with Direxion Bitcoin ETF, GraniteShares Bitcoin ETF and GraniteShares Short Bitcoin ETF (read: More Issuers Eye Bitcoin ETF Space).
Amid overvaluation concerns, the technology sector has been the star performer this year thanks to encouraging industry fundamentals, a rising interest rate scenario, Trump’s tax repatriation policy, and the emergence of new technology such as cloud computing, big data, Internet of Things, wearables, drones, virtual reality devices and artificial intelligence. ARK Innovation ETF ARKK and ARK Web x.0 ETF (ARKW - Free Report) are the biggest winners in the space, having returned more than 90% this year.
Return of Oil Bulls
With a wild ride for most of the year, crude price returned to $60 per barrel for the first time since June 2015. A major catalyst is the historic output cut deal, which is now paying off with the global oil market on its way toward balancing, by draining out some of the excess inventory. Additionally, after three long years, the oil market has been in a state of backwardation, where later-dated contracts are cheaper than near-term contracts, for months. This signals that the oil market is tightening and demand is robust, paving the way for an oil rally.
This has set the stage for a strong rebound in the energy sector, which has been a laggard from a year-to-date look. Stock-based energy ETFs like SPDR S&P Oil & Gas Equipment & Services ETF XES, VanEck Vectors Oil Services ETF (OIH - Free Report) , iShares U.S. Oil Equipment & Services ETF (IEZ - Free Report) and iShares U.S. Oil & Gas Exploration & Production ETF (IEO - Free Report) gained double-digits in a month. Futures-based energy ETFs like United States Oil Fund (USO - Free Report) and United States Brent Oil Fund (BNO - Free Report) have climbed 3.2% and 5.7%, respectively, over the past month (read: Oil ETFs Head-to-Head: BNO vs. USO).
The bullish trend will likely continue given that OPEC deal has now been extended to the end of next year. OIH and IEO have a Zacks ETF Rank #3 while XES and IEZ have a Zacks Rank #4 (Sell).
International Market Outperforms
The global stock market has climbed every single month in 2017, for the first time in the 30-year history of the MSCI AC World Index. According to the Organization for Economic Cooperation and Development, all 45 countries are on track to grow this year and are expected to continue the momentum in 2018 (read: International Markets Beat US in 2017: 3 Best Country ETFs).
Emerging markets are leading the way with WisdomTree China ex-State-Owned Enterprises Fund (CXSE - Free Report) and Guggenheim China Technology ETF (CQQQ - Free Report) rising 80.3% and 70.8%, respectively. India ETFs like VanEck Vectors India Small-Cap Index ETF SCIF and Columbia India Small Cap ETF SCIN have gained more than 65% this year. All these funds have a Zacks ETF Rank #2.
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