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3 Sector ETFs for 2018

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As we stepped into 2018, all our attention shifted to what are likely to be hot investments this year. Investors must be searching for best picks in every asset class. This is especially true given that 2017 has been piping hot for stocks thanks to Trump trade and a pickup in the economy. So, a fear for overvaluation is understandable.

Against this backdrop, we evaluate the pros and cons and highlight what could be the best sector ETFs for this year (read: 8 ETF Predictions for 2018).

Biotech

An analyst, examining bull markets over the past 50 years, concluded that technology outperforms in the late stages of a bull market. However, with the technology sector riding high in the last one year (up 33.8% in the last one year), the sector boasts overvaluation (read: Value Biotech ETFs to Buy Now).

As a result, investors can take a look at biotech stocks and ETFs for 2018. Ebbing tensions over the price gouging issue, hopes of easing regulation, positive clinical trials, FDA approvals of drugs and success in the immune-oncology field should spur a rally.

Investors can take a look at SPDR S&P Biotech ETF (XBI - Free Report) which has a Zacks ETF Rank #2 (Buy) with a High-risk outlook and a P/E of 17.76x. The P/E of XBI is lower than the P/E (19.92x) of SPDR S&P 500 ETF (SPY - Free Report) .

Energy

According to the analyst referred to above, the Energy sector also outperforms in the late stages of a bull market. Now, oil prices have made a sharp comeback to close out the year 2017, though the whole year was not so smooth. West Texas Intermediate futures jumped over $60 a barrel in late December for the first time since 2015United States Oil (USO - Free Report) and United States Brent Oil Fund (BNO - Free Report) gained about 8.8% and 21.6% in the last one year (as of Jan 5, 2018).

The constant oil price volatility hurt energy ETFs like VanEck Vectors Oil Services ETF (OIH - Free Report) in the last one year. However, the funds can gain strength ahead. As per Goldman Sachs analyst, “thanks to the shale oil revolution, producers outside the Organization of the Petroleum Exporting Countries can easily ramp up production when prices are $60 to $65.”

Added to this, the Interior Department announced last week that it wants to permit drilling in about all U.S. waters, the single largest expansion of offshore oil and gas leasing ever planned by the federal government. All these moves and possibilities better position funds like OIH in 2018. The fund gained about 7% in the last five days (as of Jan 5, 2018) while it lost about 19.4% in the last one year (read: 3 ETF Losers of 2017 That Can Rebound in Q1).

Materials

U.S. tax cuts, upbeat global growth and the resultant strong international demand plus the likely beefing-up of infrastructure spending by the government should lead to higher demand related to industrial production, which in turn feeds into seasonal strength in the material sector. Higher activity is in the offing the United States this year as the economy took momentum. This makes Materials Select Sector SPDR ETF (XLB - Free Report) our pick for 2018 (read: ETFs to Buy as U.S. Manufacturing Hits 13-Year High).

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