January 22, 2014

3 ETFs Poised to Dominate in 2014: Zacks

Despite an overall soft start to the year, three sectors in particular are thriving, the research firm says

Clean energy shows promise this year, Zacks says. (Photo: AP) Clean energy shows promise this year, Zacks says. (Photo: AP)

Although 2014 hasn’t quite been off to the roaring start that investors might have expected, given the market’s momentum through 2013, that’s not to say that there aren’t opportunities that could pay off handsomely as the year advances.

According to Eric Dutram, ETF product manager at Zacks, ETFs in three different market sectors have started 2014 with a bang, boasting Zacks' top ETF rating. Those sectors and ETFs offer investors a good chance to stay on the gravy train, according to the research firm.

The sectors offering so much promise are industrials, biotechnology and clean energy. Wait, you may say—clean energy? Isn’t that a dead issue? By no means—but we’ll get to that in a minute.

The first of these sectors, industrials, has been doing well and appears to be in line to continue doing so, bolstered by healthy car sales and manufacturing demand. While there are other means of gaining exposure to either or both trends, the First Trust Industrials/Producer Durables AlphaDEX Fund (FXR) offers a different take on its strategy. Considering that FXR is up 3.2% year to date, and in the second half of 2013 was up by approximately 22.8%, its outlook may provide more opportunity.

FXR uses First Trust’s AlphaDEX methodology, which chooses stocks from the Russell 1000 Index and then scores them according to growth factors that include 3-, 6- and 12-month price appreciation; sales to price and one-year sales growth; and in a separate scoring, value factors that include book value to price, cash flow to price and return on assets.

Once all those have been determined, and the stocks have been ranked as growth, value or in between, according to the abovementioned factors, the stocks are ranked again, with the bottom 25% eliminated. The top 75%, which make up the StrataQuant Industrials Index, are then divided into quintiles based on rankings. The top-rated quintiles are then weighted, which provides heavier exposure to the top-performing stocks.

Next on the list is the PowerShares Dynamic Biotechnology and Genome Fund (PBE), which, instead of focusing on the behemoths in the field, is more firmly targeted on small cap, with its selection process ensuring that only a third of its exposure is devoted to large caps. That gives it diversification with respect to market cap levels and also leaves it free to pick up such opportunities as small-cap companies offering hopeful drug trials or even the potential for mergers and acquisitions. Considering the amount of attention likely to be focused on biotech in the year to come, PBE looks poised to keep thriving. Its price has already risen 10% so far in 2014, following a 27% gain in 2013.

Last but far from least is the clean energy sector, represented by First Trust Nasdaq Clean Edge ETF (QCLN). Even though 2013 may not have been its finest hour, the sector has seen more heated trading so far in 2014, and a number of segments within the sector have gotten high Zacks marks.

Lest investors forget, solar isn’t the only way to go in clean energy. There are plenty of other ways than energy production to gain exposure to the sector, ranging from consumer products such as Tesla’s electric cars to the technology itself. A heavy concentration on solar may not be the way to go at present, although omitting it altogether isn’t wise, either.

Instead, QCLN’s broader approach, focused on small and mid caps and only alloting 16% to large caps, covers companies from First Solar (FSLR) to Cree Inc. (CREE—producer of LED substrate and branded lightbulbs) to Linear Technology (LLTC—producer of analog chips). Of course this can mean high volatility, but the fund has gained 6% so far this year, after a 23.6% increase in the last six months.

With yields like the ones these three ETFs have brought already in the new year, the market could be very rewarding indeed.

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