ETF ideas for 2020

Here are the top results for 5 screens from Fidelity's ETF screener.

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Global markets entered 2020 with a lot of momentum. That strength appears to have dissipated in recent weeks, as fears of Covid-19 (coronavirus) undermining global growth and earnings have rattled markets. To wit, the S&P 500 lost over 3% on Monday, February 24, and another 4% on Thursday, February 27.

It is worth noting that, until recently, US stocks had not suffered as deeply as international markets and were actually positive on the year. But this week's market action has pushed the S&P down 7% year to date on a total return basis (i.e., including dividends) as stocks had one of their worst weeks since the financial crisis.1 Global developed markets ex-US and emerging markets have not fared well either, and are down 10% and 9% year to date, respectively.1 In addition to coronavirus, lingering trade wars and other growth-slowing effects have been cited as the primary causes of international weakness.

If you think markets may be approaching a near-term bottom, the US might outperform the world in the coming weeks and months, and you are interested in exploring exchange-traded funds (ETFs) that hold US investments to help build a diversified portfolio, consider using Fidelity's ETF Screener to quickly sort through a lot of data. You can search for ETFs using a variety of characteristics like the fund's objectives, fundamentals, technicals, performance, volatility, trading characteristics, tax considerations, and analyst ratings.

Below, we feature 5 ETF screens, plus the top results for each.

1. 5-star ETFs

If you are unfamiliar with screeners or don't know where to get started, one way to get going is to utilize ratings. MorningstarTM Ratings are available on Fidelity.com. An ETF's Morningstar Rating is a quantitative assessment of the fund's past performance that accounts for both risk and return, with funds earning between 1 (lowest) and 5 (highest) stars.

As of February 27, 2020, here are the top 10 results of a screen for 5-star Morningstar-rated ETFs that hold US companies only, sorted by net assets:

  • SPDR Dow Jones Industrial Average ETF (DIA)—Morningstar has awarded this fund 5 stars based on its risk-adjusted performance derived from a weighted average of the performance figures associated with its 3- (5-star out of 1090 funds), 5- (5 star out of 941 funds), and 10-year (5 star out of 688 funds) Morningstar Rating metrics compared to the 1090 funds within its Morningstar Large Value Category.
  • iShares US Aerospace & Defense ETF (ITA)—Morningstar has awarded this fund 5 stars based on its risk-adjusted performance derived from a weighted average of the performance figures associated with its 3- (4 star out of 38 funds), 5- (5 star out of 36 funds), and 10-year (5 star out of 28 funds) Morningstar Rating metrics compared to the 38 funds within its Morningstar Industrials Category.
  • iShares US Medical Devices ETF (IHI)—Morningstar has awarded this fund 5 stars based on its risk-adjusted performance derived from a weighted average of the performance figures associated with its 3- (5 star out of 135 funds), 5- (5 star out of 125 funds), and 10-year (5 star out of 104 funds) Morningstar Rating metrics compared to the 135 funds within its Morningstar Health Category.
  • Real Estate Select Sector SPDR Fund (XLRE)—Morningstar has awarded this fund 5 stars based on its risk-adjusted performance derived from a weighted average of the performance figures associated with its 3- (5 star out of 222 funds), 5- (not available), and 10-year (not available) Morningstar Rating metrics compared to the 222 funds within its Morningstar Real Estate Category.
  • Invesco S&P Smallcap Low Volatility ETF (XSLV)—Morningstar has awarded this fund 5 stars based on its risk-adjusted performance derived from a weighted average of the performance figures associated with its 3- (5 star out of 387 funds), 5- (5 star out of 346 funds), and 10-year (not available) Morningstar Rating metrics compared to the 387 funds within its Morningstar Small Value Category.
  • WisdomTree US Largecap Dividend ETF (DLN)—Morningstar has awarded this fund 5 stars based on its risk-adjusted performance derived from a weighted average of the performance figures associated with its 3- (5 star out of 1090 funds), 5- (5 star out of 941 funds), and 10-year (5 star out of 688 funds) Morningstar Rating metrics compared to the 1090 funds within its Morningstar Large Value Category.
  • SPDR S&P Aerospace & Defense ETF (XAR)—Morningstar has awarded this fund 5 stars based on its risk-adjusted performance derived from a weighted average of the performance figures associated with its 3- (5 star out of 38 funds), 5- (5 star out of 36 funds), and 10-year (not available) Morningstar Rating metrics compared to the 38 funds within its Morningstar Industrials Category.
  • Fidelity MSCI Utilities Index ETF (FUTY)—Morningstar has awarded this fund 5 stars based on its risk-adjusted performance derived from a weighted average of the performance figures associated with its 3- (4 star out of 55 funds), 5- (5 star out of 52 funds), and 10-year (not available) Morningstar Rating metrics compared to the 55 funds within its Morningstar Utilities Category.
  • iShares US Consumer Services ETF (IYC)—Morningstar has awarded this fund 5 stars based on its risk-adjusted performance derived from a weighted average of the performance figures associated with its 3- (4 star out of 43 funds), 5- (4 star out of 40 funds), and 10-year (5 star out of 35 funds) Morningstar Rating metrics compared to the 43 funds within its Morningstar Consumer Cyclical Category.
  • Invesco CEF Income Composite ETF (PCEF)—Morningstar has awarded this fund 5 stars based on its risk-adjusted performance derived from a weighted average of the performance figures associated with its 3- (5 star out of 178 funds), 5- (5 star out of 154 funds), and 10-year (not available) Morningstar Rating metrics compared to the 178 funds within its Morningstar Allocation: 15% to 30% Equity Category.

Of course, a high analyst rating alone is not sufficient basis upon which to make an investment decision. As with any screen result, more research is needed to determine if any of these ETFs are right for your specific investing strategy.

2. High-growth ETFs

If you are looking for growth-oriented ETFs, there are several filters you can select in the Fidelity ETF screener. Among those are historical earnings growth, sales growth, cash flow growth, and book value growth.

As of February 27, 2020, here are the top 5 results of a screen for ETFs that hold US companies only, have high historical earnings growth percentage (15.7% and above), and high cash flow growth percentage (8.9% and above), sorted by net assets:

  • First Trust Dow Jones Internet Index (FDN)
  • iShares US Technology ETF (IYW)
  • Invesco S&P 500 Pure Growth ETF (RPG)
  • First Trust Technology AlphaDEX Fund (FXL)
  • Invesco DWA Momentum ETF (PDP)

Several things stand out in the screen results above. The list includes several technology-focused ETFs (unsurprisingly, given the growth screening objective). A takeaway from a screen like this could be to think about how adding a technology ETF would impact the concentration of investments for a particular sector within your portfolio.

3. High-value ETFs

Despite the recent market jitters, US stocks are still trading near record highs. Consequently, it may be particularly prudent to seek out investments with attractive valuations. There are a variety of metrics you can use to help assess value when screening for ETFs on Fidelity.com. These include price multiples such as price/earnings, price/sales, price/cash flow, and price/book value. Generally, investors view low price multiples as being relatively more attractive.

As of February 27, 2020, here are the full results of a screen selected for ETFs that hold US companies only, very low price/earnings (0.0 – 13.59), very low price/book (0.0 –1.45), and very low price/cash flow (0.0 – 7.47) multiples, sorted by net assets:

  • SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
  • WisdomTree US Smallcap Earnings ETF (EES)
  • Invesco KBW Bank ETF (KBWB)
  • iShares US Oil & Gas Exploration & Production ETF (IEO)
  • First Trust Dow Jones Select Microcap Index Fund (FDM)
  • First Trust Nasdaq Bank ETF (FTXO)
  • First Trust Energy AlphaDEX Fund (FXN)

It's worth noting that most of the results of this screen are energy focused. Energy stocks have underperformed the market in recent years, potentially helping depress the price component of their price multiples. And as with the technology ETFs in the previous screen, concentration risk associated with energy ETFs is another factor to think about.

4. High-dividend ETFs

It's a common misconception among some investors that ETFs do not pay dividends. ETFs do, in fact, pay out the full dividend that comes with each stock held in the fund. And with interest rates still relatively low compared with historical levels, investors seeking to add income-producing investments to their portfolio may be able to achieve that objective with ETFs. Of course, dividends should not be the only consideration when screening for ideas. You may also want to add some kind of risk/reward screen to filter out ETFs that have high-dividend payout ratios due to artificially depressed prices. The Sharpe ratio, for example, measures historical risk-adjusted performance, and it is calculated by dividing annualized excess returns by standard deviation. The higher the Sharpe ratio, the better the risk-adjusted performance.

As of February 27, 2020, here are the top 10 results for ETFs holding US assets only with a high distribution yield (trailing twelve months) and high Sharpe ratio (month-end 1 year) of at least 1.96, sorted by net assets:

  • iShares National AMT-Free Muni Bond ETF (MUB)
  • Utilities Select Sector SPDR Fund (XLU)
  • Vanguard Utilities ETF (VPU)
  • Invesco National AMT-Free Municipal Bond ETF (PZA)
  • iShares US Utility ETF (IDU)
  • Fidelity MSCI Utilities Index ETF (FUTY)

5. Bond ETFs

Of course, bond ETFs might also be worth your consideration if you are seeking fixed income investments to add to your portfolio. A recent trend in the ETF universe has been the emergence of bonds as a leading source of ETF fund flow strength. US-domiciled bond ETF fund flows have been accelerating for several years, and in 2019 they finally eclipsed US-domiciled stock ETFs for the first time ever. In addition to weighing the impact of interest rate moves, default rates, country/sector/industry exposures, and any other fundamental factors, momentum from fund flows might be a consideration when evaluating bond ETFs.

As of February 27, 2020, here are the full results for bond ETFs holding US assets only with very high net flows over the prior trading month and duration (i.e., the number of years required to recover the cost of all the bonds in the fund, considering the present value of all coupon and principal payments received in the future) of at most 5.09, sorted by net assets:

  • iShares National AMT-Free Muni Bond ETF (MUB)
  • iShares 3-7 Year Treasury Bond ETF (IEI)
  • Vanguard Short-Term Inflation-Protected Securities ETF (VTIP)
  • Vanguard Short-Term Treasury ETF (VGSH)
  • iShares S&P Short Term National AMT-Free Bond ETF (SUB)
  • SPDR Portfolio Short Term Treasury ETF (SPTS)
  • Invesco Treasury Collateral ETF (CLTL)

There are several risk factors to consider among some of these ETFs, including relatively low assets under management or low liquidity.

Due diligence

If you think one or more of the ETFs identified by a screen is worth considering to help manage the risk in your portfolio or achieve your objectives, your next step should be to research it further. And always remember to evaluate a fund's costs, including the following:

  • Expense ratio2: Look for low expense ratios to help reduce your overall costs.
  • Bid-ask spread: Look for small bid-ask spreads to help reduce costs of investing.
  • Tracking error: Look for a low tracking error to find ETFs that indicate a better job of replicating their benchmark indexes.

If you find ETFs with similar objectives, you could compare their expense ratios, bid-ask spreads, and/or tracking error to find the better deal. You can filter for all of these factors using the ETF screener.

Knowing what the individual components of an ETF are can also give you a better sense of what you are buying or selling. You can find an ETF's components on its ETF snapshot page on Fidelity.com, under Portfolio Composition. On that page, you can find the ETF's style (value, growth, or blend) and size (large, mid, or small), as well as ratings and key statistics.

Finally, you should fully understand the risks involved in any investment strategy. Any investing opportunity should be considered within the context of a well-diversified investment strategy that conforms to your specific time horizon, objectives, and risk parameters.

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