The fourth quarter is going to be a humdinger. You've got a presidential election between two of the most disliked candidates in our country's history. The Federal Reserve still could drop an interest-rate hike on our heads before the end of the year. Third-quarter earnings are expected to head south.
Twitter (ticker: TWTR) could become an Alphabet (GOOG, GOOGL), Walt Disney Co. (DIS) or Salesforce.com (CRM) property. Apple (AAPL) -- which makes up a big chunk of a slew of major indices, mutual funds and exchange-traded funds -- will try to fend off a disturbing trend of iPhone sales declines.
It's hard to have much confidence in anything in this market, but there are a few seasonal and situational plays that should put the odds squarely in your corner. That makes these the five best exchange-traded funds to buy for the fourth quarter.
VanEck Vectors Retail ETF (RTH). The fourth quarter rules for retailers, and it's no secret why: the holiday season.
Macy's (M) made 32 percent of its annual sales in the last quarter of 2015. Kohl's Corp. (KSS) looked similar at 33 percent. It's no different online, either, with Amazon.com (AMZN) recording more than a third of its 2015 sales during the three months ended Dec. 31.
And investors don't have to wait for when those earnings are reported after the new year. Between a "buy the rumor, sell the news" mentality plus the barrage of data we get from the sector (Black Friday sales, Cyber Monday sales, etc.), investors have a lot to work with in the fourth quarter.
Over the past 15 years' worth of fourth quarters, the Consumer Discretionary Select Sector SPDR Fund (XLY) has averaged a total return of 6.12 percent, easily besting the 4.6 percent return for the Standard & Poor's 500 index over those 15 fourth quarters, but the index's total average return from 2001 through the end of 2015.
However, the pick is the VanEck Vectors Retail ETF. Almost a quarter of XLY's weight is in media companies such as Comcast Corp. (CMCSA). RTH is much more focused on retailers, from Amazon to Home Depot (HD) to Wal-Mart Stores (WMT) -- though it has an odd 10 percent exposure to health care companies. RTH's composition has resulted in an 8.28 percent to 6.7 percent advantage over XLY in the four fourth quarters since RTH's inception.
Expenses are 0.35 percent, or $35 annually for every $10,000 invested after fee waivers and expense reimbursement.
iShares North American Tech ETF (IGM). If you go back a little further, tech stocks rule the fourth quarter. A 2015 CNBC report shows that since 1990, tech gained 80 percent of the time, and on average returned 6.6 percent -- 170 basis points better than the S&P 500 .
The best tech ETF for the final quarter is the iShares North American Tech ETF ( IGM) because it includes a little extra retail oomph. Most tech ETFs are going to include Apple in their top holdings; IGM does too, at 9 percent. But many tech funds don't hold Amazon, which is considered a retail stock in many systems. But IGM holds Amazon and weights it at a considerable 7 percent. You'll also get that IT spend through top 10 holdings such as Microsoft Corp. (MSFT) and Cisco Systems (CSCO). Expenses are 0.48 percent.
iShares U.S. Aerospace & Defense ETF (ITA). The fates of several industries will hinge on the 2016 presidential election. But one fund that scores no matter who wins is the iShares U.S. Aerospace & Defense ETF. That's because you can feel warm and fuzzy knowing that both candidates will be just dandy for defense.
The iShares' ITA exchange-traded fund is a who's who of the defense world, including Lockheed Martin Corp. (LMT) and Northrop Grumman Corp. (NOC), as well as companies like Boeing Co. (BA) that garner significant revenues from defense.
This is a winner no matter what November brings. Expenses are 0.44 percent.
Vanguard REIT ETF (VNQ). The VNQ is one of two fourth-quarter plays that are centered around the Federal Reserve and interest rates.
Last week after the September FOMC meeting, Janet Yellen & Co. opted to hold interest rates in a range of 0.25 percent to 0.5 percent, where they've remained all this year after a rate hike last December.
Remember: Some people within the Fed itself expected four rate hikes this year. We're sitting on a big ol' goose egg for 2016, and that could persist through the rest of the year. That means great things for dividend-yielding equities, such as the real estate investment trusts -- tax-advantaged corporate structures that own and operate real estate such as apartments, malls and medical facilities.
Vanguard's VNQ is a straightforward, dirt-cheap way to hold REITs. VNQ offers investors exposure to 150 of these equities, including mall giant Simon Property Group (SPG), self-storage king Public Storage (PSA) and logistics and distribution REIT Prologis (PLD). Expenses are 0.12 percent.
Direxion Daily 20+ Year Treasury Bear 3x Shares ETF (TMV). Again, a rate hike following the Nov. 2 conclusion seems unlikely. But if you have an itch that says the Fed will hike rates after it convenes in December, don't be shy.
If the Fed hikes interest rates, prices on existing bonds will fall in response as their yields will look less attractive. Longer-maturity bonds will be especially at risk. Thus, an exaggerated bet against longer bonds would pay off pretty well.
The Direxion Daily 20+ Year Treasury Bear 3x Shares ETF is a leveraged inverse fund that tries to return 3 times the inverse of the performance of the ICE U.S. Treasury 20+ Year Bond Index. In short, for every 1 percent the index loses in a given day, TMV should gain 3 percent.
But with the potential to triple your returns is the potential to triple your losses if you bet the wrong way. Also, while the leverage is minus three times on a daily basis, TMV's results skew over time -- so even if bonds go nowhere in a seesaw fashion for months, TMV might not stay flat, but instead decay into losses.
If you make this bet, do so with a small allocation from the speculative part of your portfolio. Enter it no more than a couple of weeks before December's FOMC meeting, and exit it shortly thereafter.
You could get killed, or you could make a killing. Only time -- and the Fed -- will tell. Expenses are 0.89 percent after fee waivers.
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