From Zacks: The financial world is seeing its hottest streak with the best start in many years, fueled by skyrocketing U.S. markets. The surge came despite global trade fears, political instability in Washington and geopolitical tensions.
The euphoria surrounding the new U.S. tax legislation, robust corporate earnings and optimism on global growth are acting as the key catalysts.
A massive $1.5-trillion tax cut will create an economic surge, boosting job growth and reflation trade. It will further accelerate earnings, leading to increased dividend and buyback activities. Additionally, the tax repatriation will allow companies to bring offshore cash back home, paving the way for increased mergers and acquisitions. A combination of other factors like rise in oil prices, a weak dollar and rounds of upbeat global economic data also bolstered the appetite for riskier assets (read: 8 Power-Packed ETFs for 2018).
Further, rising rates in the United States as well as the end of cheap money era internationally is boosting investors’ confidence in strengthening economies, thereby leading to further growth in the stock market.
Given this, we have highlighted some investing ideas that could prove extremely beneficial for investors this year in the bullish market:
Make Trending Sectors Your Friend
Technology and financials have been at the heart of the rally this year. Technology stocks will continue to benefit from encouraging industry fundamentals and Trump’s repatriation policy. Per Moody’s, the top five U.S. hoarders are from the technology sector, namely Apple (AAPL – Free Report) , Microsoft (MSFT – Free Report) , Cisco (CSCO – Free Report) , Alphabet (GOOGL – Free Report) , and Oracle (ORCL – Free Report) , which hold 88% of their money overseas. On the other hand, financial stocks will enjoy the dual tailwinds of lower taxes and rising rates. Tax reform may result in a further rise in interest rates that would expand net margins and bolster banks’ profits (read: Trump’s First Year in Office: 5 Must-See ETF Charts).
While the two sectors are crowded with a number of top-ranked ETFs, the most popular are State Street funds — Select Sector SPDR Technology ETF (XLK – Free Report) and Financial Select Sector SPDR Fund (XLF – Free Report) — and Vanguard funds —Vanguard Information Technology ETF VGT and Vanguard Financials ETF (VFH – Free Report) . All these have Zacks ETF Rank #2 (Buy).
Bet on U.S. Small Caps
The corporate tax cut from 35% to 21% is a big boon to small caps as these pay higher taxes with a median effective tax rate of 31.9% compared with 28% for the S&P 500 companies and 23.8% for the blue chip Dow Jones stocks. Additionally, a strengthening economy will provide further boost to these pint-sized stocks that are closely tied to the U.S. economy and generate most of their revenues from the domestic market.
While there are several options in this space that would gain from the tax cut, a bunch of Zacks Rank #1 (Strong Buy) ETFs, namely Vanguard Small-Cap Growth ETF VBK, iShares S&P Small-Cap 600 Growth ETF (IJT – Free Report) andVanguard S&P Small-Cap 600 Growth ETF VIOG could be excellent picks (read: Best Small-Cap ETFs of 2017 with Huge Upside in 2018).
Although the U.S. stock market has been skyrocketing, international investing looks tempting given cheap valuations and threats of political instability in the United States. Additionally, the monetary policy tightening outside the United States, strong growth in the Euro zone, improving Japanese economy and remarkable growth in emerging markets are adding to the strength.
As such, investors should go global to take advantage of a surge in both domestic and international markets. This can easily be done through the ultra- popular funds — Vanguard Total World Stock ETF VT, Vanguard FTSE Developed Markets ETF VEA and iShares MSCI ACWI ETF (ACWI – Free Report) . These have a Zacks ETF Rank #3 (Hold).
Focus on Pure Trump Play
The tax reform has boosted the confidence in Trump’s ability to deliver on his other promises this year. Now, Trump will move to other campaign promises like dismantling the Dodd-Frank Act as well as boosting military and infrastructure spending. Trump has promised to spend a trillion dollar on rebuilding highways, bridges, hospital and other U.S. infrastructure during his campaign. He has also promised to revive U.S. manufacturing and rehabilitate the country’s aging infrastructure.
Given this, investors should bet on Trump trade and Republicans with the new ETFs, namely EventShares U.S. Tax Reform ETF TAXR, EventShares Republican Policies Fund GOP and Global X U.S. Infrastructure Development ETF PAVE (read: 8 New ETFs of 2017 to Explode in 2018).
Add Value to Your Portfolio
Tax reform will prompt investors to rotate out of growth and into value stocks as these have strong fundamentals — earnings, dividends, book value and cash flow — that trade below their intrinsic value and are undervalued by the market. Additionally, geopolitical tensions, Trump’s protectionist stance, and mid-term elections would raise the appeal for value investing.
Value stocks have the potential to deliver higher returns and exhibit lower volatility compared with growth and blend counterparts. In fact, these stocks outperform the growth ones across all asset classes when considered on a long-term investment horizon and are less susceptible to trending markets. Some of the popular ones in this space like iShares Russell 1000 Value ETF IWD,Vanguard Value ETF (VTV – Free Report) , iShares S&P 500 Value ETF IVE andVanguard Small-Cap Value ETF (VBR – Free Report) are worth a look. These funds have a Zacks ETF Rank #3 (read: Value Investing Set to Shine on Tax Reform: 5 Cheap ETFs).
The Technology Select Sector SPDR Fund (XLK) closed at $69.19 on Friday, up $1.08 (+1.59%). Year-to-date, XLK has gained 8.19%, versus a 7.39% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of Zacks Research.