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10 Hottest ETF Themes for 2018

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For the global stock market and ETF world, 2017 was a banner year. The broader U.S.-listed ETF industry is expected to enjoy the third consecutive year of record-breaking growth with net new inflows of more than $600 billion in 2017, suggesting a strong appetite for the funds (read: Most Loved and Hated ETFs of 2017).

The strength continues in the New Year with U.S.-listed ETFs pulling in about $5.3 billion during the week ending Jan 4, a time frame that includes one trading session from 2017 and three trading sessions from 2018. Additionally, the S&P 500 and the Dow Jones reached a new milestone of 2700 and 25,000, respectively, in the initial week of 2018.

The continuation of some of last year’s hottest trades as well as new ones confirms the bullishness in the stock market. Below we have highlighted some of these:

Passive Rule

Like last year, passive investing is expected to be a top theme for 2018 too. This is especially true as corporate earnings and an improving global economy continues to be the key catalysts in the stock market, and are strongly supported by big tax cuts in the world’s largest economy. Wall Street stock strategists like Credit Suisse, Deutsche Bank, UBS, and BMO Capital expect double-digit returns for the S&P 500 Index.

With investors chasing low costs and simple structures, passive ETFs will likely garner strong investor interest as they track and replicate an index. As such, S&P 500 ETFs like SPY, IVV and VOO are expected to emerge as top asset gatherers in 2018 (read: 4 Reasons Why Investors Love Passive ETFs).

Bitcoin Mania

Though bitcoin saw wild swings last year, it climbed more than 1300%. Most of the rally was driven by rising institutional investor interest and the excitement surrounding the launch of futures contracts on the Chicago Board Options Exchange (CBOE) and Chicago Mercantile Exchange (CME), which made cryptocurrency easily available to individuals and businesses for the first time. The frenzy for the cryptocurrency will rise this year with bitcoin ETFs in the pipeline. Several issuers like REX, VanEck and ProShares refiled their applications for futures-based bitcoin ETFs while Direxion and GraniteShares showed fresh interest in the space (read: More Issuers Eye Bitcoin ETF Space).

Price War Continues

Price war has been an ongoing theme in the ETF space over the past couple of years. It is now on high gear with most of the ETFs having an expense ratio below 0.10%. According to FactSet, there are now 137 ETFs with annual expense ratios of 0.10% or less. Together, these hold 41% of all U.S.-listed ETF assets. This war is likely to continue among asset managers in order to attract investors’ money and gain market share. Most of the low-cost ETFs such as Schwab U.S. Broad Market ETF SCHB, Schwab U.S. Large-Cap ETF SCHX, iShares Core S&P Total U.S. Stock Market ETF ITOT and SPDR Portfolio Large Cap ETF SPLG offer broad exposure to the U.S. equity markets.

Telecom Overtakes Hot Tech

On Nov 21, MSCI and S&P Dow Jones Indices announced a dramatic change in its Global Industry Classification Standard (GICS), which will broaden the telecommunication services sector and rename it as communication services. The changes, which go into effect after the close of business on Sep 28, 2018, will include companies that facilitate communication and offer related content and information through various media.

The renamed sector will include the existing telecommunication companies, companies selected from the Consumer Discretionary Sector currently classified under the Media Industry Group and the Internet & Direct Marketing Retail Sub-Industry, as well as select companies currently in the Information Technology Sector. As a result, the move will reclassify consumer discretionary stocks such as Netflix NFLX, Disney DIS, Comcast (CMCSA - Free Report) and Time Warner TWN, and FAANG stocks such as Facebook FB, Apple AAPL, Amazon AMZN, Netflix NFLX and Google GOOGL to the newly created communications services sector. This would impact 30 ETFs tracking the information technology, consumer discretionary and telecom sectors.

Thus, telecom ETFs like Vanguard Telecommunications Services ETF VOX, iShares Global Telecom ETF IXP, Fidelity MSCI Telecommunication Services Index ETF FCOM and SPDR S&P Telecom ETF XTL looks attractive for 2018 with the expected inclusion of some-high profile stocks. The tax cut will also provide a huge boon to the existing telecom stocks as well as the new ones in ETFs (read: 4 Sector ETFs & Stocks Set to Explode Higher on Tax Cuts).

Small Caps Rocket

Small caps are the biggest beneficiaries of the tax cut as these pay higher taxes with a median effective tax rate of 31.9% versus 28% for the S&P 500 companies and 23.8% for the stocks in the blue-chip index. However, expensive valuations, likelihood of increased volatility and tighter credit conditions could weigh on the pint-sized stocks. As such, Guggenheim S&P 600 SmallCap Pure Value RZV looks compelling with a nice mix of small caps and value stocks, which offer stability in times of market turbulence.

Low Duration/Negative Duration ETFs Take Off

With three rates hike in 2017, the Fed is on track for three lift-offs this year again with the probability of more aggressive hikes if tax reforms boost economic growth and reflation as expected. The scenario is making these products potentially solid choices for investors seeking to retain some level of bond exposure in a rising rate environment. iShares Short Treasury Bond ETF SHV has an effective duration of 0.40 years while WisdomTree Barclays U.S. Aggregate Bond Negative Duration Fund AGND has negative effective duration of 4.81 years.

More Niche ETF Carves Out

Both existing and new issuers are active in binging innovative products to the market, carving a highly specialized theme (or niche investment) focusing on a narrow corner. AI Powered Equity ETF AIEQ has shown strong growth potential, having accumulated $94.8 million since its inception on Oct 18, whileAdvisorShares VICE ETF ACT targeting marijuana industries has attracted $11.2 million since its launch on Dec 12. ProShares Decline of the Retail Store ETF EMTY has also been able to garner investor interest, building an asset base of $14.3 million since its debut on Nov 14 (read: First Artificial Intelligence ETF Soars in Popularity).   

Oil Bulls Take Charge

Oil bulls will continue to head higher with the return of geopolitical risk in Iran, deteriorating economic situations in Venezuela, Middle East tensions, supply cuts led by OPEC, falling crude oil inventories as well as consumption boom in both developed and emerging markets especially in China though risk of enough U.S. output is dampening the outlook. Further, the oil market is in a state of backwardation (where later-dated contracts are cheaper than near-term contracts), which is acting as the biggest catalyst for the commodity. Given this, energy ETFs look to rebound strongly this year.

Mid-Term Elections

Although Republicans succeed in pushing the tax reform, their first legislation, into law, the latest polling indicates a historic Democratic upsurge in midterm elections. This is especially true as six surveys show Democrat preference over Republican congress by double digits, driving demand for the two newly launched politics ETFs — EventShares Republican Policies Fund GOP and EventShares Democratic Policies Fund DEMS (read: 8 New ETFs of 2017 to Explode in 2018).

A new CNN poll shows that 56% of voters favor a Democrat to just 38% votes for a Republican. This 18-point gap is the largest since the CNN began polling for the 2018 elections. Democrats’ advantage in the new POLITICO/Morning Consult poll stands at 10 percentage points, 44% to 34% — the party’s largest lead of the year while FiveThirtyEight puts Trump’s approval rating around 37%. Both Sabato’s Crystal Ball and Cook Political Report show that Democrats have the potential to gain at least 20 seats.

Quadrupled (4x) Leveraged Funds Finally in the Market

The quadruple-leveraged products officially arrived in the market through a suite of 10 currency ETNs from VelocityShares. The 10 ETNs represent variations on five pair of ETNs with the currencies for Japan, Europe, the United Kingdom, Switzerland and Australia. With this, VelocityShares claim the first-to-market title with an ETN wrapper.

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