At the dawn of a new year, it’s always a good idea to take stock of your portfolio and see what the new opportunities are. And after a great 2017, there are opportunities aplenty.
The S&P 500 SPX, +0.70% jumped about 20% last year, delivering some impressive gains to investors. But keep in mind that was just the average. Certain sectors or strategies performed even better.
Take China stocks, for instance, or large-cap tech. Or heck, just look at bitcoin BTCUSD, -5.50%
I expect 2018 will be another good year across the board, and I’m looking at S&P 2,900 for my year-end target. But I also think some more tactical bets could deliver even bigger gains. Here are five thematic ETFs to take advantage of specific opportunities in 2018:
Dividend growth
Every investor should consider dividend stocks, whether they seek income in retirement or simply an extra bit of performance. But with corporations raking in much more cash thanks to a lower tax rate, dividend investing this year will be more important than ever.
That’s because companies probably won’t plow the lion’s share of their newfound profits into wages or hiring. As MarketWatch’s Howard Gold pointed out a few weeks ago, that didn’t happen in 1986 and is unlikely to happen now. Instead, corporations will likely pass some of those gains on to shareholders via increased dividends or even special one-time payouts.
That’s where the WisdomTree U.S. Quality Dividend Growth Fund DGRW, +0.78% comes in. It isn’t as backward-looking like many dividend funds, which call out so-called “aristocrats” like Becton Dickinson that has steadily increased its dividends annually for almost 50 consecutive years but still yields a paltry 1.3% after a measly 2-penny increase in 2017.
Instead, the fund takes into account the prospect of future profits and long-term growth expectations, along with historic dividend growth rates. That leads to a current distribution yield of 3.8% thanks to top holdings that include Exxon Mobil XOM, -0.08% and Altria Group MO, +0.28%
Emerging markets
In 2017, globally oriented investors were richly rewarded, as many markets outside of the U.S. outpaced the S&P’s brisk performance. That is likely to continue in 2018, with Goldman Sachs recently forecasting double-digit growth for the popular MSCI emerging-markets index driven by a “younger and friendlier” credit cycle.
There are no shortage of index funds out there to play emerging markets, including the massive iShares MSCI Emerging Markets ETF EEM, +0.86% that is benchmarked to the very index Goldman mentioned in its 2018 outlook. However, I like the lesser-known Schwab Fundamental Emerging Markets Large Company Index ETF FNDE, +0.82%
Despite its long-winded name, the fund isn’t all that quirky. It’s simply biased toward large-cap companies with a screen for fundamentals as well as raw market cap to determine weighting.
The result is a similar portfolio as other top EM funds, with names like South Korea’s Samsung Electronics 005930, -0.19% Russia’s Gazprom OGZD, +0.69% and China Construction Bank 601939, -1.04% The difference is that Schwab is more spread out around the world with about 20% of assets in South Korea, 18% in China and 13% Russia. That compares with almost 30% in China for the iShares fund, plus another 11% in exchanges on Taiwan.
If you want a truly global fund instead of just an iteration on Chinese equities, the Schwab fund provides a more balanced option.
Energy sector
This could be the year of a long-awaited comeback for energy stocks. After plunging across 2014 and 2015 along with the collapse of crude oil prices, we’ve at last seen some stability return to the oil and gas space.
In fact, integrated energy giant Chevron CVX, -0.16% has surged an impressive 42% since its early 2016 bottom, and oilfield services company Haliburton HAL, +0.37% has leapt about 49%, compared with 32% for the S&P 500 in the same period.
True, stocks in the oil patch remain down from prior highs a few years ago. But recent momentum to end the year bodes well — as do stable energy prices CLG8, +0.05% and a weaker U.S. dollar DXY, +0.30% that should act as a tailwind for commodity stocks.
There are many sector funds to play energy, but I prefer the Guggenheim S&P 500 Equal Weight Energy ETF RYE, -0.07% because it balances out the holdings regardless of size. Many investors may not know that the iShares U.S. Energy ETF IYE, -0.07% has 38% of its portfolio in Exxon Mobil and Chevron, or that the Energy Select Sector SPDR Fund XLE, -0.04% is even worse with 40% in those two. Why not just by the individual stocks with that much riding on two names?
Instead, the equal-weight approach of the Guggenheim ETF means you get about 3% allocation toward 32 different holdings — both familiar megacaps as well as smaller names in the sector.
Aerospace & defense
As I wrote back in December, the next big investing theme out of Washington will be the continued rise of the defense industry. It has been clear amid arm-twisting over the budget and spending priorities that the military at worst will be kept whole and more than likely will see a boost in spending under President Trump.
The recent uprising in Iran and the latest childish Trump tweet directed at North Korea show that geopolitical tensions are on the rise. That should make it very difficult to move away from aerospace and military spending even if there weren’t campaign promises on the line.
There are only a handful of sector-specific funds that play defense stocks, but the winner in my book is the SPDR S&P Aerospace & Defense ETF XAR, +0.75% As with other funds on this list, the reason is because of greater diversification; each stock is a bit more than 3% of the portfolio as opposed to a fund like the iShares U.S. Aerospace & Defense ETF ITA, +0.90% where Boeing BA, +4.10% alone is 11% of the fund.
The SPDR fund outperformed the market in 2017 with roughly 30% returns vs. about 20% for the S&P 500, and investors can expect that trend to continue in 2018.
Junk bonds
There remains much skepticism over junk bonds, since the asset class is trading for very little risk premium despite a history of volatility and big losses for investors in past years, including a nearly 20% crash for those bonds in 2015.
However, despite the worries of the last few years and a rough spot for junk bonds to end 2017, there remains a good case to be made for high yield bonds — particularly shorter duration debt that is less sensitive to changes in interest rates.
Take the iShares 0-5 Year High Yield Corporate Bond ETF SHYG, +0.02% that yields about 5.2% right now. The fund has been choppy, but finished 2017 with capital appreciation of about 5% on top of that generous dividend from the high-yield bonds in its portfolio.
With a diversified junk bond fund, you can smooth out some of the bumps in the road. And while I certainly expect there to be individual companies that see some fireworks, a thriving American economy and strong appetite for high-yield debt means that the environment is generally favorable for junk in 2018.