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4 Sector ETFs That Beat the Market in Q3

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Though escalation in U.S.-China trade tensions, emerging market meltdown and rounds of tech sell-off played spoilsport in the stock market, the Wall Street extended its largest bull run in the third quarter. In fact, the S&P 500 touched 2,900 for the first time in history on Aug 28 and the Dow Jones soared to its first record high on Sep 20 since late January.

The impressive performance was primarily driven by the dual tailwinds of solid corporate earnings and a booming economy. The rounds of upbeat data have bolstered confidence in the economy, leading to risk-on trade. This is especially true as America is witnessing the fastest pace of growth in nearly four years, with a nearly two-decade low unemployment rate of 3.9% and 18-year high consumer confidence. Historic tax cuts, higher government spending and deregulation are fueling growth.

Additionally, the Fed is on track for gradual rate hikes this year, citing that the economy is strong and can handle a tighter monetary policy. The central bank, which began to tighten monetary policy in 2015, has raised rates thrice this year and is expected to do so again in December. A rising rate scenario also signals a strengthening economy, which is spurring stock market growth (read: Fed Hikes Rates as Expected: ETF Areas That Gained).

That said, a few sectors easily crushed the market in the third quarter. Below we have highlighted four sectors ETFs that have gained in double digits and could be better plays in the months ahead, should the trends prevail.

ETFMG Alternative Harvest ETF MJ

This cannabis-related ETF was on a tear in the third quarter amid the backdrop of more legalization of the plant for recreational use, which has paved the way for a merger mania, spurring a large number of deal activities in the industry.

As such, MJ emerged as the biggest winner in the third quarter, gaining 31.7%. This is the first and only ETF targeting the cannabis/marijuana industry. It tracks the Prime Alternative Harvest Index, designed to measure the performance of companies within the cannabis ecosystem, benefiting from global medicinal and recreational cannabis legalization initiatives. The fund holds 40 securities in its basket with higher concentration on the top four firms. Canadian firms make up 60.5% of the portfolio, while American firms comprise just 21%. The ETF has AUM of $664.5 million and trades in a good volume of around 444,000 shares. It charges 75 basis points (bps) in annual fees (read: Why Marijuana Stocks and ETF are Soaring).

ARK Genomic Revolution Multi-Sector ETF (ARKG - Free Report)

This is an actively managed ETF focusing on companies that are expected to benefit from extension and enhancement of the quality of human and other life by incorporating technological and scientific developments, improvements and advancements in genomics into their business. The surge in demand for artificial intelligence in the advancement of diagnoses and treatment across the healthcare spectrum has been driving this ETF higher. Per the fund’s fact sheet, the cost of sequencing the DNA of a full human genome should drop below $100 by 2022.

The fund holds 36 stocks in its basket with higher concentration on the top three firms. About one-fourth of the portfolio is allotted to gene therapy, closely followed by targeted therapeutics (16%), instrumentation (15.5%), beyond DNA (14.8%) and bioinformatics (11.3%). The product has accumulated $340.5 million in its asset base and trades in average daily volume of 126,000 shares. It has 0.75% in expense ratio and has gained 15.6% in the third quarter.

SPDR S&P Aerospace & Defense ETF XAR

Aerospace & defense stocks ride higher on increased NATO defense spending, robust demand for passenger jets as well as earnings optimism. XAR offers equal-weight exposure to 34 stocks by tracking the S&P Aerospace & Defense Select Industry Index. It has been able to manage $1.6 billion in its asset base, while trades in average daily volume of around 107,000 shares. It charges 35 bps in annual fees and has gained 13.6% in the third quarter. The fund has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: Market-Beating, Top-Ranked ETFs of the Longest Bull Market).  

VanEck Vectors Oil Refiners ETF CRAK

Oil refiner stocks are getting a boost from a wider Brent-WTI spread and solid corporate earnings. As oil refiners use oil (WTI) as an input for processing refined petroleum products like gasoline, they benefit from the higher spreads (selling at Brent price) leading to healthy margins. The higher the spread, the more the profits will be for oil refiners. Further, strong earnings from players in this industry also boosted the appeal for the ETF (read: ETFs Set to Benefit/Lose From Higher Brent Prices).

With AUM of $71.4 million, this ETF is a one-stop shop for investors to play the oil refining market. It follows the MVIS Global Oil Refiners Index, holding 25 stocks with a moderate concentration on the top firms. The product charges 59 bps in annual fees and trades in lower average daily volume of 26,000 shares. It is up 13.3% in the third quarter.

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