ETFs for the second half of 2017

Here are some ETF opportunities to consider after recent developments in the market.

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With the first-quarter earnings season in the rearview mirror, along with the June interest rate increase by the U.S. central bank and several significant global elections, some investors may be looking to explore new opportunities or reevaluate existing holdings.

If you are interested in exchange-traded funds (ETFs), one tool that may be of use is Fidelity’s new ETF screener that can quickly sort through a lot of data based on choices you make, to help you identify specific investments. You can search for ETFs using a variety of characteristics like the funds’ objectives, fundamentals, technicals, performance, volatility, trading characteristics, tax considerations, and analyst ratings.

Below, we feature three examples of ETF screens that you might consider running, in light of recent market developments, plus the top results for each.

1. Sector ETFs

According to S&P Capital IQ, seven of the 11 U.S. sectors are projected to see year-over-year earnings per share gains during the second quarter, led by energy, financials, and technology, while consumer discretionary, industrials, and utilities are expected to report the largest declines (see table below).

S&P 500 EPS changes as of 06/07/17
EPS growth %
S&P 500 sector
Q1 2017
Q2 2017e
2016 2017e
Consumer discretionary
4.2 (2.5) 8.5 6.0
Consumer staples
3.9 4.4 4.3 5.7
Energy (1029.6) 408.3 (77.8) 312.8
Financials 39.8 26.9 15.0 12.2
Health care 5.6 0.2 7.6 3.8
Industrials 3.8 (4.1) 2.0 5.6
Information technology 22.7 9.2 4.9 11.2
Materials 20.2 3.0 (1.7) 12.5
Real Estate 0.0 0.0 0.0 2.3
Telecommunications services (4.8) 1.8 (0.1) (0.4)
Utilities 2.4 (9.6) 6.5 (1.5)
S&P 500 15.5 6.2 0.3 10.6
Source: S&P Global Market Intelligence, as of June 7, 2017

If you want to explore U.S. energy, financials, and technology sector ETFs within the Fidelity.com ETF screener, select objectives, equity, sector, and energy, financials, and information technology. If you want to search for the largest ETFs in these sectors, select basic ETF/ETP facts, net assets, very high. You might also consider adding additional criteria. For example, value, using price-to-earnings (P/E) by selecting fundamentals, equity, and low price/trailing earnings.

As of June 22, 2017, the first 10 results of this sample screen, sorted by lowest (i.e., most attractive) P/E, were:

  • SPDR S&P Insurance (KIE)
  • PowerShares KWB Bank Portfolio (KBWB)
  • Vanguard Financials (VFH)
  • Fidelity MSCI Financials Index (FNCL)—available for purchase commission-free on Fidelity.com
  • Financial Select Sector (XLF)
  • First Trust Financials AlphaDEX Fund (FXO)
  • First Trust Nasdaq Bank (FTXO)
  • iShares U.S. Financial Services (IYG)
  • SPDR S&P Bank ETF (KBE)
  • iShares U.S. Financials ETF (IYF)

2. Bond ETFs

The major news from the Fed’s June 14 meeting was a 0.25% increase in the fed fund rate (this rate is the key interest rate set by the U.S. central bank, which influences most other domestic interest rates). The rate hike was widely expected; indeed, prior to the announcement, fed funds futures were forecasting a 100% probability of a 0.25% increase.

This year, the yield curve has flattened (i.e., the gap between short-term and long-term rates has narrowed), with the spread between the 2-year Treasury note and 10-year Treasury bond falling below 79 basis points for the first time since early September 2016 (see chart below, left). Meanwhile, inflation—which is a core component that influences the Fed’s monetary policy decision-making process—remains tame (see chart below, right).

While the Fed expects to raise rates slowly, and appears to be embarking on a historic balance sheet reduction over the coming years, Bill Irving, manager of Fidelity® Government Income Fund, Fidelity Treasury Inflation-Protected Bond Fund, Fidelity GNMA Fund, Fidelity Mortgage Securities Fund, and Fidelity Strategic Real Return Fund, says that investors should avoid the temptation to trade tactically in and out of the bond market.

For most investors, long-term strategies to manage rising rates may make sense. For active investors, Irving thinks there may be short-term opportunities: he continues to see Treasury Inflation-Protected Securities (TIPS) as modestly cheap relative to conventional Treasuries. “TIPS have underperformed in recent months, and have given back much of the gains they had between the November election and the Fed’s December rate hike,” Irving notes.

If you’d like to look for ideas among U.S. TIPS ETFs using the screener, select fixed income, U.S. inflation protected. The largest 10 U.S. inflation-protected ETFs, sorted by net assets, as of June 22, 2017, were:

  • iShares TIPS Bond (TIP)—available for purchase commission-free on Fidelity.com
  • Vanguard Short-Term Inflation Protected Securities Index Fund (VTIP)
  • Schwab U.S. TIPS (SCHP)
  • FlexShares iBoxx 3-Year Target Duration TIPS Index Fund (TDTT)
  • iShares 0-5 Year TIPS Bond (STIP)—available for purchase commission-free on Fidelity.com
  • PIMCO 1-5 Year US TIPS Index ETF (STPZ)
  • SPDR Bloomberg Barclays Capital TIPS ETF (IPE)
  • FlexShares iBoxx 5-year Target Duration TIPS Index Fund (TDTF)
  • PIMCO 15+ Year US TIPS Index Fund (LTPZ)
  • SPDR Bloomberg Barclays 1-10 Year TIPS ETF (TIPX)

3. International ETFs

With U.S. stocks near all-time highs, you may want to review your portfolio to ensure that your strategic asset allocation is not out of balance with your objectives. Beware of complacency, as rising stock prices can be great for your account balance, but they can also increase your portfolio volatility and move your asset allocation away from your targets.

One way you may be able to help enhance your portfolio diversification is via international stocks. U.S. stocks have risen roughly 250% since the depths of the financial crisis in 2009, more than doubling the returns of international stocks. But that hasn’t been the case so far in 2017. Amid questions about the U.S. political situation and more focus on the valuations of U.S. stocks, the trend has reversed so far this year.1

Of course, there have been numerous international developments in recent months, including elections in the U.K. and France, plus central banks in the U.K., Switzerland, and Japan all held potentially market-moving meetings last week. Thus, there have been reasons to exercise caution investing in international waters.

But European stocks may generally offer more attractive valuations compared with U.S. stocks, according to Fidelity’s latest business cycle update. If you’d like to explore European ETFs in the ETF screener, select objectives, region objectives, and Europe. You may also choose to add in some fundamental filters under equity, for example, including high cash flow growth % and a low price/cash flow.

As of June 22, 2017, the full results of this sample screen were:

  • SPDR Euro Stoxx Small Cap (SMEZ)
  • First Trust Stoxx European Select Dividend Income Fund (FDD)

Due diligence

If you think one or more of the ETFs identified by a screen is one you want to consider to help manage the risk in your portfolio or achieve your objectives, your next step should be to research it further. The results of the international screen, in particular, are worth examining in more detail. For instance, international investing involves more risk, and the results of this screen feature lower liquidity relative to other, more widely held ETFs. Further research will help you better understand what you are buying.

Trade settlement

Effective Sept. 5, 2017, the financial industry shortens the settlement cycle from three business days after the trade date (T+3) to two business days (T+2) for several security types, including ETFs.2

Also, trading costs are among the many factors that you should analyze when considering an ETF. Factoring in the impact of commissions, for example, can be particularly relevant for active investors who trade somewhat frequently—especially if you are making relatively small-sized trades—as well as long-term investors executing a dollar cost averaging strategy. Furthermore, you should be aware of changes that are coming to how trades are settled, and what the impact may be (see sidebar).

In addition to commissions, a few other key factors to consider for any ETF (which you can find on Fidelity.com, on an ETF’s snapshot page) are:

  • Expense ratio: Look for low expense ratios to reduce your overall costs.
  • Bid-ask spread: Look for small bid-ask spreads to 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 this page, you can find the ETF’s style (value, growth, or blend) and size (large, mid, or small), as well as analyst 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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