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3 Globally Winning ETF Areas of Q3

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The third quarter of 2018 was all about the ebb and flow of trade tensions. While signs of improvement were noticed in the trade terms between the United States and the Euro zone and Mexico, trade relations turned bitter with China (read: Buy High-Beta & Momentum ETFs on US-EU Trade Truce).

Still, the S&P 500 recorded its best quarterly gain since the fourth quarter of 2013, rising more than 7% as trade tensions were largely priced-in. The Nasdaq Composite climbed 7.1% — its best since first-quarter 2017. The quarter also marked its ninth successive quarter of gains while the Dow Jones climbed 9.3%.

Against this backdrop, let’s take a look at which ETF areas have exceled globally in the third quarter.

U.S. Outshines

The U.S. market was a top performer in Q3 on solid economic momentum. Other key economies like the Eurozone expanded 0.3% sequentially in the second quarter of 2018, falling shy of market expectations and the previous quarter’s growth of 0.4%. The Japanese economy advanced 0.7% sequentially in Q2, while U.S. GDP growth was 4.2%.

Investors should note that FTSE gauge of U.S. market jumped 7.5% followed by Japan (up 6.6%), developed economy (up 5.5%) and all-world (up 5.2%). SPDR S&P 500 ETF (SPY - Free Report) was up 3.3%, iShares MSCI Japan ETF (EWJ - Free Report) was up 2.4%, iShares MSCI EAFE ETF (EFA - Free Report) lost 2.7% and iShares MSCI ACWI ETF (ACWI - Free Report) inched up 0.5%.

Defensives Rule

Health care stocks were most sought-after for “their lower volatility and greater earnings stability across most regions” in the third quarter. The sector is viewed as a defensive one which has helped it stand out despite tensions between the United States and China.

After targeting each other’s $50-billion worth of imports, President Trump imposed a new tariff of 10% on $200 billion worth of Chinese goods in September. The tariff will be raised to 25% effective Jan 1, 2019 (read: Trump Slaps $200B in China Tariffs: ETFs in Focus).

Investors should note that the U.S. health care supply chain is consolidating fast, with deals across the industry ranging from insurers, pharmacies to drug distributors. The health care sector’s debt-to-equity levels are 30% lower than the broader S&P 500.

The sector is estimated to see return-on-equity more than double to 27.2% by the end of 2019 against the 19.72% expected growth in the broader market. The factors have made the sector more attractive to companies looking to expand inorganically, per the source (read: Health Care ETFs Outperforming: Will the Rally Last?).

U.S. healthcare ETFs Health Care Select Sector SPDR ETF (XLV - Free Report) and iShares US Healthcare ETF (IYH - Free Report) have added about 8.8% and 8.4% in the past three months (as of Oct 5, 2018) while iShares Global Healthcare ETF (IXJ - Free Report) advanced around 7.1%.

Large Caps Beat Small Caps

Large caps had an edge over smaller ones in Q3. The S&P 500 and iShares Russell 1000 ETF (IWB - Free Report) added about 3.3% and 2.8% in the past three months (as of Oct 5, 2018) while the Russell 2000 lost about 3.7%.

In the first half of this year, trade war fears hit the U.S. large-cap stocks while in the second half, tensions were priced-in. Plus, “above-trend economic growth, robust corporate earnings and weakening US dollar momentum” bode well for capitalization, according to ftserussell.com (read: Trade Fear Oversold? Large-Cap Growth ETFs at 52-Week High).

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