Fittingly, the U.S. stock market sprouted growth during the first week of Spring. Despite slipping on Friday (largely because of Nike’s post-earnings weakness), the Dow Jones Industrial Average and S&P 500 posted gains of more than 2% for the week.
With Chairman Powell downplaying the recent uptick in inflation and forecasting three 2024 interest rate cuts, investors’ hopes continue to spring eternal pushing equity indices to fresh record highs. Heading into the final week of the first quarter, the S&P 500 is up 9.7% year-to-date and 32.6% over the last 12 months.
While these are gains that most stock investors would be pleased with, some sector funds are performing much better. Sector funds invest in a specific industry or set of industries. They are less diversified and typically carry more risk than the popular SPDR S&P 500 ETF (SPY) — but they also have the potential for outsized gains.
Over the past year, these three sector ETFs have rewarded risk-taking shareholders in a big way:
Best Sector ETF #1: VanEck Semiconductor ETF (SMH)
As of March 22nd, the VanEck Semiconductor ETF (SMH) has an 81.8% one-year total return. The fund is benefiting from a sharp recovery in demand for chip production and equipment. In tracking the MVIS U.S. Listed Semiconductor Index, it focuses on the largest and most traded semiconductor stocks. This not only gives SMH high marks for liquidity, but for global diversification since it includes both domestic and international industry leaders.
Despite its lofty return, SMH has a reasonably low expense ratio of 0.35%. Since its December 2011 inception, the ETF has produced a 25.9% annualized return. A $10,000 investment at the time of inception would be worth $177,377 today. Of course, much of the growth is tied to Nvidia (NVDA) which currently represents more than 20% of the portfolio. This makes SMH a way to gain significant exposure to the artificial intelligence (AI) chip leader while reducing single-stock risk.
Best Sector ETF #2: Pacer Data & Digital Revolution ETF (TRFK)
Nvidia is also the top holding in the Pacer Data & Digital Revolution ETF (TRFK) with a current weighting of 12.9%. This ETF is up 70.2% over the last 12 months which puts it in the top 3% of all U.S. technology funds according to Morningstar. It is a rules-based fund which means stock selection is based on pre-determined criteria. Companies must generate at least 50% of their sales from data-related products or services and meet certain size and trade volume requirements.
While TRFK predominantly consists of technology companies, it also offers exposure to industrial companies that are significantly involved in the big data and digital transformation trends. Broadcom, Advanced Micro Devices, Cisco Systems, and Intel round out the top five positions.
Best Sector ETF #3: AXS Esoterica NextG Economy ETF (WUGI)
The AXS Esoterica NextG Economy ETF (WUGI) invests in companies tied to 5G networking and other emerging technologies powering the digital economy. This includes companies that provide 5G communications infrastructure, edge devices, or services that support things like video streaming, cloud gaming, Internet of Things, and remote surgery.
The fund is actively managed which means stocks are chosen directly by a portfolio manager rather than through index tracking. It also means it carries a higher net expense ratio (0.75%) than most passively managed funds. Launched in March 2020 near the pandemic market bottom, WUGI has a 145.9% cumulative return since inception and a 68.2% one-year return. It currently contains 34 holdings led by Nvidia, Microsoft, and interestingly, a 6.6% cash position.