There’s still plenty of work to be done to erase last year’s losses, but stocks are off to a strong start in 2023 – a point confirmed by the S&P 500 adding 6.29% in January.
This is despite concerns that a recession will arrive at some point this year and forecasts that first- and second-quarter earnings per share for domestic large-cap companies will likely experience year-over-year declines. Indeed, those are headwinds, but they are not acting as such. Not yet, anyway.
Still, data indicates market participants need some convincing before more fully embracing risk assets. There’s still a record $5 trillion in cash sitting in money market funds, according to Bank of America. Translation: January’s strong showing by equities wasn’t enough to move the needle for many investors.
Conversely, a case can be made the current environment isn’t as dour as some experts are proclaiming, indicating risk-tolerant investors can find attractive tactical opportunities. One way of making that objective easy is with industry exchange traded funds, several of which are highlighted here.
SPDR® S&P® Aerospace & Defense ETF (XAR)
Industry ETFs such as the SPDR® S&P® Aerospace & Defense ETF (XAR) often receive renewed attention during times of geopolitical conflict and with Russia’s invasion of Ukraine nearly a year old, XAR is proving its responsiveness. This industry ETF jumped 7.38% last month, extending its one-year gain to 9.49% -- well ahead of the broader market over that period.
As experienced investors, there are catalysts for defense stocks beyond war, namely government spending and that arrives every year. Not only does the recently passed omnibus legislation set aside massive amounts of cash for defense spending, which could benefit some XAR components, the fund could prove durable in a recession.
“During the last defense spending cycle between 2001 and 2011, the U.S. economy experienced two economic recessions," according to State Street Global Advisors (SSGA). "Supported by the secular increase in defense spending, the aerospace & defense industry showed greater resilience in the challenging economic environment, posting stronger growth than the broad market for most years and outperforming 39% over the broad market on a cumulative basis over the same period."
WisdomTree Efficient Gold Plus Gold Miners Strategy Fund (GDMN)
The WisdomTree Efficient Gold Plus Gold Miners Strategy Fund (GDMN) is proving to be at the right place at the right time. Gold is getting its groove back in the early innings of 2023.
Bullion’s January showing could be a sign market participants are wagering the Federal Reserve will be reserved in its approach to raising interest rates in the first quarter and ultimately halt that practice as soon as the second quarter. That could set the stage for GDMN upside because this industry ETF is unique among its peers in that it provides exposure to both gold miners and gold futures. Plus, miners’ fundamental picture is compelling.
“Gold miners’ shares are trading at 1.67 times price-to-book value (P/B), marking a 2.59% discount to the long-term average," according to WisdomTree research. "The book value, also often referred to as the net asset value (NAV), is the theoretical value of a company’s assets net of liabilities. We believe Gold miners offer attractive dividend yields amid the backdrop of a rising rate environment. Currently, gold miners offer a dividend yield 2.4% higher than the S&P 500 Index at 1.72%."
KraneShares MSCI China Clean Technology Index ETF (KGRN)
Investors looking for an efficient avenue for participating in potential rebounds by Chinese and clean technology stocks need not look much further than the KraneShares MSCI China Clean Technology Index ETF (KGRN).
This industry ETF follows the MSCI China IMI Environment 10/40 Index, which is a basket of Chinese companies with direct ties to that country’s massive renewable energy initiatives. In fact, few countries are devoting as much government spending to reducing pollution and shoring up clean tech as China, indicating KGRN could be an interesting long-term tactical idea. Recent data from the International Energy Agency (IEA) confirm the allure of this industry ETF.
“Countries around the world are stepping up efforts to expand clean energy technology manufacturing with the overlapping aims of advancing net zero transitions, strengthening energy security and competing in the new global energy economy,” noted the IEA. “The current global energy crisis is a pivotal moment for clean energy transitions worldwide, driving a wave of investment that is set to flow into a range of industries over the coming years. In this context, developing secure, resilient and sustainable supply chains for clean energy is vital.”
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Todd Shriber
Todd Shriber got his start in financial markets as a reporter with Bloomberg News. Later, he became a trader at a Southern California-based long/short hedge fund where he specialized in trading sector and international ETFs leading up to and during the financial crisis. He would later become the web editor at ETF Trends. Currently, he analyzes, researches and writes on ETFs for a variety of Web-based publications and financial services firms.Shriber has been quoted in the Barron's, CNBC.com and the Wall Street Journal. His work has been published on Web sites such as Benzinga, ETF Daily News, ETF Trends, MarketWatch, Fox Business and Nasdaq.com.
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