ETF Watchlist: Week of December 11, 2017

As we get ready to wrap up 2017, many investment houses have already begun turning their attention to 2018. The S&P is already up more than 18% so far this year, 20% if you throw in dividends, and, perhaps not surprisingly, analysts are looking at yet another solid year for equities in 2018. Few analysts ever issue really bearish targets on the S&P 500, but this year, they are especially consistent in feeling that more gains are in store.

Take a look at these 2018 targets for the S&P 500. FYI… the S&P 500 is currently at around 2650.

The consensus of this group is that the S&P 500 stands to gain another 8-9% next year. Add in another 2% or so in dividends, and it could be another year of double digit gains. Morgan Stanley is the least bullish out of the bunch, forecasting gains of just 4% next year. Oppenheimer predicts that we’ll finally see 3000 on the S&P 500, a gain of more than 13%.

I’m a bit more cautious. Yes, I can understand the bull argument. Year-over-year earnings and revenue growth should continue to look solid. Unemployment is low. Inflation is in check. If the tax reform package gets passed, many corporations could be flush with fresh cash. I can understand forecasts of 8-10% gains again next year. Here’s what I worry about though. The Fed will, undoubtedly, raise interest rates later this month and possibly another three times in 2018. Friday’s jobs report looked good, but wage growth is still weak. What happens if the Fed raises rates too far, too fast? Valuations have come a bit more in check, but they’re still stretched by historical standards. If volatility returns, could investors get spooked and start heading for the exits? And let’s not forget that the chances of a war seem to be growing by the day. I’m more on the Morgan Stanley end of the spectrum. A 2018 gain in the low- to mid-single digits seems like a fair balance of good and bad. I’ll have my 2018 preview piece coming up soon to go into more details.

In the meantime, here are your four ETFs to watch in the upcoming week.

SPDR S&P Insurance ETF (KIE)

It only takes one disaster to put insurance companies in peril. We saw it earlier this year with Hurricanes Harvey and Irma, which sent insurance stocks down about 9% before they came ripping back a month or two later. Property damages from the California wildfires could run well into the tens of billions of dollars. So far, the Wall Street reaction has been relatively mild. The Insurance ETF is only about 1% off of its highs, but keep an eye for when more concrete damage estimates come in.

Others: iShares U.S. Insurance ETF (IAK), PowerShares KBW Property & Casualty Insurance ETF (KBWP)

Global X Robotics & Artificial Intelligence Thematic ETF (BOTZ)

Robotics and artificial intelligence are taking over many industrial, technological and medical tasks, and the trend is expected to continue to grow rapidly. There are two main ETFs that focus on this space. Why did I choose to highlight BOTZ instead of ROBO? BOTZ has a lower expense ratio, is more diversified outside of the U.S. and focuses more on bigger names. Robotics is much like the cybersecurity sector. There are lots of names, but only a few likely winners over the long-term. It’s better to own the basket instead of trying to figure out who’s going to come out on top.

Others: ROBO Global Robotics and Automation Index ETF (ROBO), AI Powered Equity ETF (AIEQ)

iShares U.S. Preferred Stock ETF (PFF)

Preferreds are a favorite choice for income seekers, because they pay big dividend yields. The drawback is that they generally offer little capital appreciation potential to go with it (since the beginning of 2010, the share price of this ETF is up only 5% total). The Preferred ETF might be an interesting play in 2018, because it’s so heavily invested in financials. With multiple rate hikes in the offing as well as a possible boost from both tax and regulatory reform, preferreds could be in a nice spot for some juicy returns.

Others: PowerShares Preferred ETF (PGX), First Trust Preferred Securities & Income ETF (FPE)

iShares Edge MSCI USA Value Factor ETF (VLUE)

Momentum has been a huge winner in 2017, but lately we’ve seen a bit of cooling off from this area. Since November 28th, momentum has actually been the weakest performing factor. Which factor has performed the best during that period? Value, believe it or not. It’s way too small of a sample size to suggest that this is some kind of change in leadership, but it’s worth keeping an eye on.

Others: Fidelity Value Factor ETF (FVAL), Oppenheimer Russell 1000 Value Factor ETF (OVAL)

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