ETF Watchlist: Week of April 17, 2017

After rallying impressively since the election, the markets may finally be starting to show signs of fatigue. For the first time since November, the S&P 500 has closed below its 50 day moving average. Volatility has begun to move back up, albeit modestly, and geopolitical events could begin putting real downward pressure on stocks. The S&P 500 currently sits around 3% below its all time high, also a level it hasn’t seen since November. A 3% pullback isn’t anything out of the ordinary but it’s easy to see it extending further if tensions remain high in North Korea or if companies start missing 1st quarter earnings estimates.

Speaking of earnings, the Q1 season goes into full gear this week with well over 250 companies reporting. S&P 500 companies are expected to deliver 10% year-over-year earnings growth this quarter, the strong quarterly forecast in the past few years. Given that much of the market’s rally has been built around multiple expansion, the next move up in stocks will likely need to be driven by earnings growth. One of every quarter’s most watched earnings reports, Netflix (NFLX), drops after the close on Monday and gets followed up later in the week by Bank of America (BAC), Goldman Sachs (GS), Johnson & Johnson (JNJ), IBM (IBM), Morgan Stanley (MS), eBay (EBAY), Qualcomm (QCOM), Visa (V) and General Electric (GE).

With all of that in mind, here are four ETFs that I think could be on the move this week.

Technology Select Sector SPDR ETF (XLK)

Given the large slate of reports coming this week, you could target any number of areas to keep an eye on. I went with the financials last week with Citigroup (C), Wells Fargo (WFC) and JPMorgan Chase reporting. You could make the argument that financials should be on watch again this week with big banks such as Goldman Sachs and Bank of America, brokerages such as E-Trade (ETFC) and TD Ameritrade (AMTD) and asset managers such as BlackRock (BLK) delivering reports this week.

I’m going with the technology sector this week. In addition to Netflix, IBM and Qualcomm, we’ll hear from cybersecurity names Proofpoint (PFPT) and Barracuda Networks (CUDA) along with Yahoo (YHOO) - now Oath following its merger with AOL (AOL). Tech has been the top performer so far in 2017. Let’s see if earnings support the rally.

Others: Vanguard Information Technology ETF (VGT), First Trust Dow Jones Internet Index Fund (FDN), iShares U.S. Technology ETF (IYW), First Trust NASDAQ 100 Technology Sector Index Fund (QTEC)

ProShares Ultra VIX Short-Term Futures ETF (UVXY)

Much has been made of the lack of volatility in the markets over the last several months. The VIX has been suppressed since the election. The S&P 500 went over 100 days without a 1% decline. The market has made a remarkably steady upward climb over the past five months, but both market and political events could be setting up to break the trend.

The VIX moved back above 16 for the first time since November. That level really isn’t considered “volatile” by any stretch but as that number trends higher it tends to increase the odds of a downward move in stocks. A big earnings week coupled with increasing uncertainty with North Korea (never a good sign when bombs are paraded down the streets of Pyongyang) make for a more unstable environment.

Others: iPath S&P 500 VIX Short-Term Futures ETN (VXX), ProShares VIX Short-Term Futures ETF (VIXY)

VanEck Vectors Junior Gold Miners ETF (GDXJ)

Success is a good problem to have until it becomes an actual problem. That’s exactly what happened to this fund in the past week. As this fund was posting a 30% gain in the first few weeks of the year, investor money began pouring in. What started the year as a $3.5 billion has swelled to a $5.5 billion fund leaving the fund’s managers scrambling to figure out what to do with all the new money. As assets grew and the fund began owning significant stakes in some of its top holdings, it was forced to expand the criteria for inclusion in the fund. The fund has changed its mandate to require it to invest only 80% of assets in securities from the underlying index. The other 20% of assets can be invested in other areas.

This may sound like a minor change but it has far reaching implications. It shows the problems that can occur when one fund owns too much of the sector that it operates in. The biggest problem is that the fund is no longer a pure proxy for small cap gold miners. Look no further that the fact that the fund’s #3 holding is the VanEck Vectors Gold Miners ETF (GDX), a portfolio of LARGE CAP gold miners. This is no small issue as these types of changes can fundamentally alter what a fund is supposed to look like. Given how rapidly passive investing has and continues to become, don’t be surprised if this issue becomes more commonplace. It’s not as big of a deal for an S&P 500 index fund but for leading funds that operate in small niche sectors of the market, this could become a bigger and bigger issue.

iShares Edge MSCI USA Momentum Factor ETF (MTUM)

Momentum has been the best performing of the major smart beta factors thus far in 2017 and it’s not really even close.

As the Trump rally fades, momentum could start losing its leadership position and give way to more defensive factors such as value or quality. Part of the reason the fund has done so well is its 40% allocation to tech. Keep an eye on tech earnings this week to get a sense of whether or not this year’s rally is indeed being supported by earnings growth.