2018 has been an incredible year for stocks. Here are the five top-performing sectors of this year, and the top exchange-traded fund (ETF) in each industry.
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1. Small Cap Health Care
The top ETF of the small-cap health care sector is Invesco S&P SmallCap Health Care ETF (Nasdaq: PSCH), which is up an astounding 43% in 2018. The fund follows the S&P SmallCap 600 Capped HealthCare Index and has 80% of its assets deployed into common stocks of small-cap healthcare companies. The ETFs top three holdings are Ligand Pharmaceuticals, Neogen Corp, and HealthEquity.
Wow, this came as a surprise to me. The SPDR S&P Internet ETF (Nasdaq: XWEB) takes second place in top-performing sector ETFs with a nearly 40% surge in 2018.
The fund seeks to follow the total return performance of S&P Internet Select Industry Index. Under normal market conditions, the fund generally invests at least 80% of its total assets in the securities comprising the index.
Its top three holdings are Etsy, Web.com, and Wayfair. Other top weighted holdings include Netflix, Twitter, and PetMed Express.
When I drill down into the reasons for the stellar performance of the internet sector, it's not as surprising as I initially believed. The prime movers are social media and the incredible explosion of data. Social media helps fuel demand for online shopping, and big data allows advertisers to directly target the audience most likely to purchase their goods and services. Add in the uptick in disposable income and widespread adoption of the 4G network, and it only makes sense that the internet sector is thriving.
As 5G gets rolled out and consumers continue to shift toward online shopping, I can only foresee upside for the future. The wildcard is consumer's optimism remaining at high levels. Should consumers lose faith in their economic future, all bets are off on the internet sector!
3. Commodities: Cocoa
As crazy as it may sound, Barclays Bank IPath Bloomberg Cocoa Subindex Total Return ETN (NYSE: NIB) is higher by nearly 20% this year.
The ETN seeks to benchmark cocoa as an asset class. It is built on the futures contract on cocoa and reflects the returns earned via an unleveraged allocation in that contract in addition to the rate of interest from Treasury Bills.
Cocoa just took off in the first quarter of the year, but starting in May, the price plunged lower. Weaker grinding levels led the commodity lower until a bottom was hit during the first week of August.
The ETF bounced solidly from the $23.00 per share zone and is currently flirting with the 50- and 200-day pure moving average resistance in the low to high $27.00 per share zone.
I like the technical picture on this ETF. Entering longs on a break out at $28.00 per share with stops just below the 50-day SMA makes sense.
4. Health Care Equipment
The health care equipment subsector has been upward trending for 2018, sans several sharp drops, booking a nearly 31% gain on the year. This performance was reflected in SPDR S&P Health Care Equipment ETF (NYSE: XHE), which follows the S&P Health Care Equipment Select Index with at least 80% of its assets invested in stocks comprising the index.
Health care equipment benefits from the wave of innovation that is sweeping the sector. Combine the inherent innovative nature of the industry with the aging population and growth in emerging markets, and it paints a very bullish picture going forward.
5. Innovative Technology
With a name like FactSet Innovative Technology ETF (Nasdaq: XITK) how can this ETF lose during bull markets? As a fan of FactSet's data services, I was delighted to see XITK posting nearly 32% returns so far in 2018.
Companies included in the ETF derive at least half of their revenue from information technology services, hardware, and software manufacturing, electronic components manufacturing, manufacturing equipment and services, and electronic media. Additional selection requirements include that the companies must exhibit innovation. While this may seem to be vague, it is the precise meaning that, to be considered innovative, companies must be in the top quartile revenue growth over one-year and three-year periods. Each firm is being given equal weight within the fund.
Top current holdings include Trade desk, Twilio, and Everbridge.
I like this ETF in the $102.00 per share zone and expect to see additional substantial upside in 2018.
Risks To Consider: Past performance is no guarantee of future results. No matter how well a stock has performed in the past, no one knows for sure what the future holds. Always use stops and position size wisely when investing.
Action To Take: Consider adding one or more of the above top performers to your portfolio.