ETF Watchlist: Week of January 8, 2018

The equity markets kicked off 2018 in much the same way they closed out 2017 - a slow, steady march upwards. The Dow, S&P 500 and Nasdaq all posted four straight days of gains to kick off the new year. In fact, that’s four new ALL-TIME HIGHS to kick off the new year too. A couple of fun stats courtesy of Ryan Detrick on Twitter…

• The S&P 500 set four new all-time highs in the first four trading days of 2018. What’s the record for consecutive new all-time highs to kick off a new year? That would be 6 set back in 1964.
• What’s the record for the longest streak of up days to start a new year? The S&P 500 was up 7 straight trading days in 1987.
• Since 1950, the Dow has been up 25% or more 10 times. How did the Dow do in the year following such strong gains? It was up 8 times, with 6 of those being double digit gains.

Of course, that last fact doesn’t tell us anything about 2018 will look like, but after just one week, it seems to be off to a good start! Year-to-date, the Dow is already up 2.3%, the S&P 500 is up 2.6% and the Nasdaq is up 3.4%. On top of that, the volatility index is back near all-time lows after rising modestly towards the end of last year.

If there’s one thing to prepare yourself in 2018, it’s higher volatility. A market this calm is a significant outlier, and it’s appropriate to expect the equity markets to begin bouncing around more at some point in the near future. Remember, volatility isn’t a thing to be feared. It’s normal, it’s healthy and it’s a necessary part of longer, sustained rallies.

Here’s to a profitable 2018, and here are your first four ETFs to watch in the new year!

ETFMG Alternative Harvest ETF (MJX)

If you’re looking for the hottest ETF story of the year so far, look no further than the Marijuana ETF. Since its debut right after Christmas, the fund is already up to $260 million in assets and could be poised to become a multi-billion product before long. A pot ETF has been in demand ever since states began making recreational marijuana use legal. The debut of this fund also coincides nicely with California’s legalizing the sale of recreational marijuana at the beginning of the year. This figures to be a highly volatile product, as evidenced by its daily moves during this year alone, but it’s also got a lot of upside potential.

iShares U.S. Financial Services ETF (IYG)

The financial sector is traditionally one of the first groups to begin reporting quarterly earnings in a major way. Fourth quarter earnings reports are going to start dropping in earnest this week with JPMorgan Chase (JPM), Wells Fargo (WFC), PNC Financial (PNC) and BlackRock (BLK) all delivering results on Friday morning. The Financial Services ETF has roughly one-quarter of its assets committed to these four names, so it could be on the move late in the week.

Others: Financial Select Sector SPDR ETF (XLF), SPDR S&P Bank ETF (KBE), iShares U.S. Financials ETF (IYF), Vanguard Financials ETF (VFH)

VanEck Vectors Oil Services ETF (OIH)

The energy sector was the market’s one big laggard in 2017, but 2018 is shaping up to be a whole different story. After declining for much of the year, oil prices rebounded and hit the psychologically important $60 mark. Oil hovering around this level represents a better balance of supply demand than when oil was at $110 or $30. During the latter part of the year, oil company stocks didn’t keep up with oil prices, presenting a potential “catch-up” opportunity. That looks to be playing out in 2018 so far, as the Oil Services ETF is already up 7% on the year. I think energy could pull off a repeat of 2016, and become one of 2018’s better performers.

Others: SPDR S&P Oil & Gas Equipment & Services ETF (XES), Energy Select Sector SPDR ETF (XLE), Vanguard Energy ETF (VDE), SPDR S&P Oil & Gas Exploration & Production ETF (XOP)

VanEck Vectors Steel ETF (SLX)

Now that healthcare and tax reform have had their chance in Congress, the focus in Washington could turn now to infrastructure. Since the election, the Steel ETF has returned 47%, including a 7% gain already in 2018. Solid economic growth worldwide, increased industrial production and projected infrastructure spending could all act as catalysts for a strong steel demand in the coming months.

Others: Materials Select Sector SPDR ETF (XLB). Vanguard Materials ETF (VAW), iShares U.S. Basic Materials ETF (IYM)