With heightened volatility and uncertainty last year, the U.S. stocks logged in the worst performance since 2008. The S&P 500 index ended 2015 marginally in red and Dow Jones posted its first annual decline since 2008. The woes started with the relentless slide in crude oil, political turmoil in Greece, a strong dollar, weak corporate earnings, lofty valuations and Fed uncertainty, and then extended to geopolitical tensions and global growth concerns, especially emanating from China.
However, the Nasdaq Composite was up 5.7% at the close of the year. This suggests that the broad-based performance of the stocks was not ugly. While the energy sector was the biggest laggard in 2015, consumer discretionary led the way higher, followed by healthcare, information technology and consumer staples.
As most of the headwinds of 2015 are likely to persist in 2016, volatility would continue to cripple the stock market throughout the year. Given this, one must take great precaution while investing in 2016. Here, we have highlighted 16 best picks for 2016 that look to outperform and cost less than many other products (read:16 Bold ETF Predictions for 2016).
Financial Select Sector SPDR Fund (XLF): The financial sector has clearly emerged out of the worst recession seen in 2008 and is showing strong momentum over the past year thanks to improving fundamentals and positive sentiment across banks. A healthy job market, renewed housing recovery and rising consumer confidence are leading to higher demand for all types of financial services, spreading optimism into the entire sector. As such, the ultra-popular XLF with AUM of $19.6 billion will get a huge boost in 2016. The fund has a Zacks ETF Rank of 2 or ‘Buy’ rating.
SPDR S&P Regional Banking ETF (KRE): While a rate hike will benefit the broad financial sector, the regional bank category may be the clear winner due to the steepening yield curve. These banks seek to borrow money at short-term rates and lend at long-term rates. If interest rates rise, the banks would be able to earn more on lending and pay less on deposits. This would expand net margins and bolster banks’ profits. KRE is one of largest and the most popular ETFs in the banking space with AUM of over $2.6 billion and a Zacks ETF Rank of 2 (read: Top ETF Stories of 2015).
iShares Russell 2000 Growth ETF (IWO): Small caps are considered the barometer of the domestic economy and the rate hike is an indicator of a stronger economy and increased confidence. As the economy improves, small caps tend to outperform, making IWO a lucrative choice for 2016. IWO provides exposure to a broad basket of 1,195 stocks, earnings of which are expected to grow at an above-average rate relative to the market by tracking the Russell 2000 Growth Index. It has AUM of $6.8 billion and a Zacks ETF Rank of 1 or ‘Strong Buy’ rating.
PowerShares QQQ ETF (QQQ): This ETF performed strongly in 2015, outplaying all the concerns and is expected to sustain its momentum in 2016 as well. This is especially true as the top performing sectors of 2015 – information technology, consumer discretionary, healthcare and consumer staples – occupy the top positions in the fund’s basket. QQQ has a Zacks ETF Rank of 2.
First Trust ISE Cloud Computing Index Fund (SKYY): In an increasingly digitalized world, demand for novel and advanced technologies such as cloud computing, big data, smartphones, high-speed fiber networks, and the Internet of Things is growing by leaps and bounds. These are creating great opportunities for the emerging tech companies. While the Internet ETFs are no doubt the best investments for 2016, SKYY having a Zacks ETF Rank of 2 could lead the tech way higher.
Market Vectors Oil Refiners ETF (CRAK): The oil price collapse has beaten every corner of the energy segment barring oil refining. This is because the players in this industry use oil as an input for processing refined petroleum products like gasoline. Hence, lower oil prices are boosting margins for refiners, leading to healthy stock prices. The recently introduced CRAK is the only ETF for investors to play the oil refining market. It measures the performance of the largest and most-liquid companies that generate at least 50% of their revenues from crude oil refining including gasoline, diesel, jet fuel, fuel oil, naphtha, and other petrochemicals, or have at least half of their assets devoted to the refining of crude oil (read: 5 ETFs to Profit from the Oil Collapse).
U.S. Global Jets ETF (JETS): Airlines are the biggest beneficiaries of cheap oil and a recovering economy. As per the International Air Transport Association (IATA), global airlines are expected to make record profit of $33 billion in 2015 and break it with $36.3 billion in profits in 2016. As a result, JETS that provides exposure to the global airline industry, including airline operators and manufacturers from all over the world will continue to get a boost this year. It is just eight months old and has accumulated $52.8 million in its assets so far.
First Trust NASDAQ Global Auto ETF (CARZ): The auto industry has been on high gear and is on track to break the all-time record of 17.35 million vehicles reached in 2000. Robust growth was driven by cheap fuel, high demand for light trucks, a plethora of new models, need to replace aging vehicles and the easy availability of credit. Rising income, increasing consumer confidence and higher spending power also added fuel. Though CARZ is under appreciated as indicated by its AUM of only $39.6 million, it should see robust growth opportunities this year. The fund has a Zacks ETF Rank of 2.
iShares U.S. Home Construction ETF (ITB): Thanks to soaring demand for new and rented homes as well as affordable mortgage rates, the housing sector is booming. This trend is likely to continue and investors could tap this with the help of ITB, which is a pure play to the home construction sector. The ETF has over $1.9 billion in AUM and a Zacks ETF Rank of 2.
iShares Russell Top 200 Growth ETF (IWY): While small caps tend to perform better in a growing economy, a rising interest rate environment no doubt favors large cap stocks. This is because most of the large cap companies have huge cash piles on their balance sheets and face no financing problem in a rising rate environment. As such, risk-adverse investors prefer larger, stable, well-known companies over smaller riskier players. While there are many solid picks in this space, IWY offers exposure to those stocks that are expected to see earnings growth at an above-average rate than the market. It is relatively unpopular with AUM of $576.6 million but has a top Zacks ETF Rank of 1 (read: Auto ETFs & Stocks to Ride on This Holiday Season).
ProShares S&P 500 Aristocrats ETF (NOBL): While the Fed has started raising rates, it will follow the gradual path. In addition, bouts of volatility and uncertainty will keep investors’ defensive – focusing on dividend stocks that provide stability in the form of payouts and safety in the form of mature companies that are less vulnerable to the large swings in stock prices. As such, NOBL, which provides exposure to the companies that raised dividend payments annually for at least 25 years, looks like an interesting pick. The fund has AUM of over $1 billion and a Zacks ETF Rank of 2.
First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN): The oil price collapse, quite ironically though, has hit alternative energy stocks. But some interesting industry trends like increased investments in renewable energy, the historic Paris climate deal and the U.S. tax credit extension have built up a positive momentum in the space lately that should provide a huge boost to the solar and wind stocks. With AUM of $65.5 million, QCLN provides exposure to the U.S. clean energy companies across a wide range of industries, including solar power, biofuels, advanced batteries, as well as the installation of new technological systems. The product has a Zacks ETF Rank of 3 or ‘Hold’ rating (read: Inside the Recent Surge in Clean Energy ETFs).
PowerShares S&P SmallCap Health Care Portfolio (PSCH): Despite the meltdown due to concerns over price gouging and increased regulatory scrutiny in September, the healthcare sector made a strong comeback. This trend is likely to continue given the M&A boom, strong earnings growth, cost-cutting efforts, promising drug launches, aging population, higher healthcare spending and Obamacare. Along with attractive fundamentals, the sector provides a defensive tilt to the portfolio due to its non-cyclical nature, which leaves it unaffected by global turmoil. While many of the healthcare ETFs look attractive, PSCH targeting the small cap segment of the broad healthcare space could emerge as a winner again in 2016. It has amassed $276.8 million in AUM and has a Zacks ETF Rank of 1.
First Trust Consumer Discretionary AlphaDEX Fund (FXD): Solid job additions, slowly rising wages and cheap fuel are allowing consumers extra money to spend on a wide range of products. Further, an improving U.S. economy, a recovering housing market and stepped-up service activities is making the consumer segment a great space to stay invested in. That being said, FXD looks like an intriguing pick as it follows an AlphaDEX methodology and ranks stocks in the space by various growth and value factors, eliminating the bottom ranked 25% of the stocks. The fund has AUM of $2.4 billion and a Zacks ETF Rank of 1 (read: 4 Solid Reasons to Buy Consumer Discretionary ETFs).
iShares MSCI India ETF (INDA): After slow growth in most of 2015, India – Asia’s third-largest economy – is back on track as a string of economic reforms have started to pay off. Given the positive developments, India has become the world's fastest-growing economy, outpacing China, and remains a bright spot given that most emerging economies are struggling to revamp growth. INDA is the largest and popular ETF in this space with AUM of $3.5 billion and a Zacks ETF Rank of 2 (read: Top-Ranked ETFs to Tap India's Growth Story).
iPath US Treasury Steepener ETN (STPP): This product directly capitalizes on rising interest rates and performs better when the yield curve is rising. The ETN looks to follow the Barclays US Treasury 2Y/10Y Yield Curve Index, which delivers returns from the steepening of the yield curve through a notional rolling investment in U.S. Treasury note futures contracts. The fund has only $2.6 million in AUM.
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SPDR-FINL SELS (XLF): ETF Research Reports
SPDR-KBW REG BK (KRE): ETF Research Reports
ISHARS-RS 2K GR (IWO): ETF Research Reports
NASDAQ-100 SHRS (QQQ): ETF Research Reports
FT-CLOUD COMPUT (SKYY): ETF Research Reports
MKT VEC-OIL REF (CRAK): ETF Research Reports
US GLOBAL JETS (JETS): ETF Research Reports
FT-NDQ GL AUTO (CARZ): ETF Research Reports
ISHARS-US HO CO (ITB): ETF Research Reports
ISHARS-R T200 G (IWY): ETF Research Reports
PRO-SP5 ARISTOC (NOBL): ETF Research Reports
NASDAQ-CL EDG G (QCLN): ETF Research Reports
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16 ETFs You Can't Go Wrong With in 2016
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