ETF Watchlist: Week of October 2, 2017

September has been a traditionally weak month for the stock market. Not this year. Both the Dow and the S&P 500 posted 2% gains during the month, while the Nasdaq tacked on another 1%. Through the first three quarters of 2017, that puts the Dow up by 13.4%, the S&P 500 up by 12.5% and the Nasdaq up by 20.7%. Small-caps and mid-caps have trailed their larger brethren this year, but virtually every asset class and region of the world is up this year. The only exceptions - energy and Russia. The energy sector is still down about 7% on the year, but it’s well off of its lows thanks to a rally in crude that has pushed the price per barrel back over $50. Russia is also rallying and is now down just 3% on the year after being down more than 17% as recently as June.

Barring any unforeseen circumstances, the table is set nicely for the stock market to continue trending positive for the remainder of the year. The only event on the calendar right now that could cause a hiccup would be December’s Fed meeting. The futures market is currently pricing in a 77% chance of a rate hike. The Fed indicated the possibility of multiple rate hikes by the end of 2018, although inflation is back below the Fed’s target level. A move too high, too fast could cause some trouble, but that seems more like a concern for 2018 at this point. Right now, it looks like we’re headed towards our 9th consecutive year of gains. Enjoy the ride while it lasts!

Here’s this week’s list of ETFs that you should focus on in the coming week.

Vanguard FTSE Emerging Markets ETF (VWO)

This ETF is still up more than 24% on the year, but it dropped more than 3% this past month over the period of about half a dozen trading days. Is it the beginning of a market breather following a 20-month run that has seen the fund gain nearly 60%? The fundamentals still look pretty good for emerging markets and I think the bulls are still in charge. Technical analysts are saying that emerging markets may have finally broken out of a 10-year long down trend. Don’t push the panic button on this one, but do keep an eye on it.

Others: iShares Core MSCI Emerging Markets ETF (IEMG), iShares MSCI Emerging Markets ETF (EEM), Schwab Emerging Markets Equity ETF (SCHE)

First Trust Dow Jones Internet ETF (FDN)

All of the biggest tech names - Apple (AAPL), Alphabet (GOOG), Tesla (TSLA), Netflix (NFLX), Microsoft (MSFT) - are all up more than 20% this year, but some of them showed some cracks in their armor in September. Amazon (AMZN) is about 4% off of its September highs. Apple and Netflix are down 6%. Tesla is in correction territory down 11%.

These pullbacks are probably healthy for a group that has had such a run-up lately. The modest pullback after a nice run can be a good thing as the market digests some of its gains. It can also help set up a longer-term uptrend. Some of the valuations are a little frothy, so it could be a sign that the market is still pays attention to a company’s fundamentals.

Others: Technology Select Sector SPDR ETF (XLK), Vanguard Information Technology ETF (VGT), iShares U.S. Technology ETF (IYW)

PowerShares S&P Small Cap Energy ETF (PSCE)

Energy has easily been the biggest market loser this year, but the beleaguered sector has been making a comeback over the last month or so. In June, oil dropped below $43 a barrel. Since then, oil has moved back to around $52 and oil stocks have responded. None, however, have responded bigger the small cap energy names.

The Small Cap Energy ETF has risen 30% since August 21st, while the broader Energy Select Sector ETF (XLE) has posted a 12% gain. Another reminder that nothing stays out of favor forever, and things can change directions quickly.

iShares 7-10 Year Treasury Bond ETF (IEF)

The 10-year Treasury note has risen from a yield of 2.05% about a month ago to 2.37% today, pushing this ETF off by more than 2% from its recent highs. This is likely a signal that the bond market is expecting higher rates from the Fed in the coming quarters and investors are positioning themselves accordingly.

Others: iShares 3-7 Year Treasury Bond ETF (IEI), iShares U.S. Treasury Bond ETF (GOVT), Vanguard Intermediate-Term Government Bond ETF (VGIT)

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