The Wall Street logged the strongest year since 2013 with the S&P 500 gaining 19.4% and the Dow Jones capping 25.1% gains last year, with the highest-ever number of record closes. Blockbuster corporate earnings and the resurgent global economic growth were the major catalysts in driving the stocks throughout the year.
Growth in the U.S. economy has been solid, buoyed by an impressive labor market, higher wages, increasing consumer spending and high consumer confidence. Notably, the economy expanded at the fastest clip in three years in best back-to-back quarters with at least 3% GDP growth and unemployment at the lowest level of 4.1% since December 2000. Americans are highly optimistic about the economy, with consumer confidence hovering near the highest level in 17 years (read: 7 Biggest ETF Stories of 2017 to Continue in 2018). This combined with the optimism over the biggest tax overhaul in decades has raised the appeal for riskier assets. The new tax structure will save billions in the corporate world, boosting earnings and reflation trade. It would further spark a wave of share buybacks, dividend hikes and mergers & acquisitions. All these suggest that an eight-year bull market still has legs and will strengthen the second-largest bull run in the history. If these aren’t enough, oil price has also rebounded strongly to $60 per barrel and will continue rising given easing global supply cut and increasing demand. Nevertheless, North Korea tensions, Brexit concerns, Fed aggressive rates hike, Washington turmoil, mid-term elections and overvaluation fears might weigh on the stock performance. Given this, we have highlighted a pack of ETFs that look to outperform in 2018 given the current trends. SPDR Dow Jones Industrial Average ETF (DIA): This ETF, tracking the Dow Jones Industrial Average, has been the biggest beneficiary of the rotation in leadership in the large-cap domestic space and Trump’s pro-growth policies. The index has moved up 5,000-points this year — the biggest annual gain in its history. The bullish trend is likely to continue this year. With AUM of $22.3 billion, the fund has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: 8 ETF Predictions for 2018). SPDR S&P Regional Banking ETF The banking sector will enjoy the dual tailwinds of lower taxes and rising rates. According to Keefe, Bruyette & Woods, tax cuts would add 16% to median bank earnings in 2018 and 18% in 2019 while AB Bernstein sees earnings per share jumping 12-20% at large banks and 15-25% at mid-caps banks in 2018. Tax reform may result in a further rise in interest rates that would expand net margins and bolster banks’ profits. KRE is one of largest and the most-popular ETFs in the banking space with AUM of over $4.3 billion and a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: KRE: ETFs to Bet on the Final Tax Bill: What Hot, What's Not). First Trust Nasdaq Oil & Gas ETF The energy sector is poised for a surge given that the historic OPEC output cut deal has started to pay off with the global oil market on its way toward balancing, by draining out some of the excess inventory. The oil market has returned in a state of backwardation, where later-dated contracts are cheaper than near-term contracts, after three long years. This signals that the oil market is tightening and demand is robust, paving the way for an oil rally. FTXN seems a compelling choice as it measures the performance of the most liquid oil and gas securities from the NASDAQ US Benchmark Index screened through volatility, value and growth. The fund is overlooked by investors with AUM of just $4.2 million. It carries a Zacks ETF Rank #3 (read: FTXN: Oil ETFs Head-to-Head: BNO vs. USO). Vanguard Small-Cap Growth ETF The corporate tax cut from 35% to 21% is a big boon to small caps as these pay higher taxes with a median effective tax rate of 31.9% compared with 28% for the S&P 500 companies and 23.8% for the blue chip Dow Jones stocks. Additionally, a strengthening economy will provide further boost to these pint-sized stocks that are closely tied to the U.S. economy and generate most of their revenues from the domestic market. VBK, with AUM of $7 billion, targets the growth corner of the small-cap segment and has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook (read: VBK: Best Small-Cap ETFs of 2017 with Huge Upside in 2018). iShares US Aerospace & Defense ETF Defense ETFs are poised to surge from a steep $700 billion increase in military spending, nuclear threats from North Korea, and higher demand from commercial aviation. ITA has AUM of $4.9 billion and a Zacks ETF Rank #2 with a Medium risk outlook. ITA: iShares Dow Jones US Technology ETF The technology sector will continue its hot streak in 2018 buoyed by repatriation tax holiday plan, which allows tech titans to bring back its offshore cash home at a reduced rate. Per Moody’s, the top five U.S. hoarders are from the technology sector, namely Apple IYW: AAPL, Microsoft MSFT, Cisco CSCO, Alphabet GOOGL, and Oracle ( ORCL Quick Quote ORCL - Free Report) , which hold 88% of their money overseas. This would propel the stock prices of these companies higher. IYW has the largest concentration on these firms with a combined 42.7% of assets. As such, the ETF, having AUM of $4 billion and Zacks ETF Rank #1 with a Medium risk outlook, has a huge potential upside (read: 5 Tech ETFs That Crushed FANG ETFs in 2017). iShares U.S. Dividend and Buyback ETF This ETF has shown strong momentum since its debut in early November 2017, accumulating nearly $2.6 million in AUM and will likely to do so in 2018. This is because it invests in U.S. companies that return capital to shareholders by paying dividends or buying back their stock. And new tax structure will lead to increased buybacks and fatty dividends. DIVB: First Trust Consumer Discretionary AlphaDEX Fund Solid job additions, slowly rising wages and rising consumer confidence are allowing consumers to spend extra money on a wide range of products. Further, lower tax rates for both corporates and individuals would lead to more savings that in turn boost discretionary spending. Notably, the new tax rates for individuals are 10%, 12%, 22%, 24%, 32%, 35% and 37% compared with the current structure of 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. That said, FXD looks like an intriguing pick as it follows an AlphaDEX methodology and ranks stocks in the space by various growth and value factors, eliminating the bottom ranked 25%. The fund has AUM of $508.9 million and a Zacks ETF Rank #2 with a Medium risk outlook. FXD: Want key ETF info delivered straight to your inbox? Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>