If you want a simple way to get tailored, diversified exposure to the stock market, it’s hard to beat exchange-traded funds. ETFs are inexpensive, and you can find funds that will cover just about any part of the market that you’re interested in pursuing.
So far in 2018, the stock market has been choppy, with most stock market benchmarks having made little progress in producing gains during the first half of the year. Yet some ETFs have been a lot more successful, and there’s reason to believe that at least some of those high-performing funds have more gas in the tank to produce further gains.
|ETF||Assets Under Management||Expense Ratio||2018 YTD Return|
|Invesco S&P SmallCap Health Care (NASDAQ: PSCH)||$666 million||0.29%||30%|
|First Trust Dow Jones Internet Index (NYSEMKT: FDN)||$8.77 billion||0.53%||27%|
|iShares MSCI Saudi Arabia (NYSEMKT: KSA)||$263 million||0.74%||22%|
A healthy bet
The Invesco S&P SmallCap Health Care ETF has tapped into the demand among investors for one of the highest-growth areas of the market. As its name suggests, the ETF focuses on biotechnology, pharmaceutical, medical device, and healthcare facilities businesses that are on the smaller end of the size spectrum. The fund currently has almost 75 holdings, and more than 60% of its assets are split evenly between healthcare equipment suppliers and providers of healthcare services. Biotech gets about a 20% allocation in the fund, with pharma getting a 10% weighting and the rest going toward technology and life-sciences businesses.
A lot has been made about the current challenges that the healthcare industry faces, and huge companies outside the sector are looking at ways that they can exert influence over the way that healthcare gets delivered to the broader population. What often goes unnoticed, however, are the contributions of smaller companies within the healthcare space, whose incremental advances look insignificant in isolation but add up to make game-changing impacts on the industry. Investors have finally started looking at small-cap names in healthcare again, and the big advances that the Invesco ETF has seen in the space shows the importance that these companies have in driving healthcare innovation.
The internet is booming
The 2010s have rivaled the late 1990s in terms of the huge returns that many major players in the technology space have seen, especially those that concentrate on harnessing the power of the internet. The First Trust ETF has been a leader among internet ETFs for a long time, and its top holdings feature the giants of the technology space, including leading e-commerce, social media, streaming video, cloud computing, and financial tech players. Even in a flattish overall market, 24 of the fund’s top 25 holdings are up so far this year, and half a dozen have seen returns of 50% or more in 2018.
Many investors fear that top internet stocks have come too far, too fast and are poised for declines. Yet the trends that gave these stocks a competitive advantage over their peers and that allowed them to enjoy fundamental business growth at much faster rates than companies in other industries show no signs of going away anytime soon. Investors shouldn’t expect a straight-up move for the First Trust ETF in the future, but it still offers good return prospects despite having expenses that are a bit high for an index-following fund structure.
Looking to the Middle East
One market that almost no one looks at in the U.S. is the Saudi stock market. The iShares line of ETFs includes many country-specific funds, and although the Saudi Arabian ETF is one of its smaller members, it’s also the best-performing one so far this year. The ETF holds more than 70 stocks that are located in the Middle Eastern nation, and the fund’s relatively high expense ratio reflects the fairly small size of the fund as well as the expense of investing in a small emerging market.
It would be fair for investors to think that a Saudi Arabian ETF would just be a proxy for the oil market, but surprisingly, energy stocks play an insignificant role in the portfolio. Instead, financial stocks make up fully 40% of the fund’s assets, with materials stocks representing another third. Consumer and telecom stocks make up the majority of the remainder, with other sectors having only token showings in the fund.
Nevertheless, the success of the Saudi economy overall remains reliant on oil, and so you can expect this ETF to rise and fall with prevailing conditions in the energy markets. So far, that’s been a positive force in 2018, but all you need to do is look at past years when oil wasn’t rising to see what has generally happened with Saudi stocks in the past.
Can these ETFs keep gaining?
These top ETFs have done well in 2018, and there’s reason to think that they’ll continue to perform strongly. With good trends underway in the energy, tech, and healthcare sectors, all three of these ETFs could continue to gain ground for the rest of the year and beyond.
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