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.