ETF's to Buy, to Sell, and to Watch in 2017

Matt Thalman - INO.com Contributor - ETFs


Now that we have rung in the New Year, now is a good time to take a look at your portfolio and make some adjustments. But, before you start buying and selling, you need to know what to buy, what to sell and what you should have on hold.

So with that in mind, let's take a look at a few Exchange Traded Fund's you may want to buy, a few you should sell, and a couple that you should have in your hold or watch list.

What To Buy

In 2016 one of the top performing ETF's was the Direxion Daily Regional Banks Bull 3X Shares (PACF:DPST). DPST rose more than 114% in 2016 due to its exposure to regional banking stocks, and of course is three times bullish leverage. And while most of the time I would tell you not to follow a trend from one year to the next, 2017 is going to be different. The banking stocks rose in 2016 for a number of reasons, but mainly because the economy grew stronger and interest rates rose.

There are no signs at this point indicating that neither of those trends will cease to continue in 2017, so ride this trend.

Ok, let's slow down and understand why this trend will continue to work. A strong economy means higher interest rates are warranted. Higher interest rates mean the banks can charge a wider spread from what they pay for money and what they lend that money out at. This increased spread goes to the bottom line of a bank's balance sheet, making the bank more profitable and thus a higher shares price. In 2016 the smaller banks performed better than the larger ones for a number of reasons, but one main reason is that they have fewer and smaller revenue streams. Thus when one revenue stream does way better than before, it makes a bigger difference on earnings. The small interest rate boost in 2016 helped all banks, but really helped the small ones, hence why the regional banks ETF were one of the best ETFs in 2016.

Heading into 2017, the smaller banks could continue to do better than the larger ones, but I wouldn't play just that trend. I believe all the banks will do well, thus you shouldn't limit yourself to just the regional banking ETFs. A few that I like are the Vanguard Financials Index Fund (PACF:VFH), the Guggenheim S&P 500 Equal Weight Financials ETF (PACF:RYF), the PowerShares S&P SmallCap Financials Portfolio (NASDAQ:PSCF), and the Spider S&P Regional Banking ETF (PACF:KRE).

What To Sell

The Federal Reserve has started increasing interest rates and plans to continue doing so for the next few years. While those interest rate increases will help the banks, they will hurt bond prices and those who are holding bond funds.

Here is why. When you own a 10 year bond that is say paying 1.5% and it has 8 years left until it matures. If interest rates move higher and a newly issued 10 year bond with the same risk profile is now paying 2%, the value of your bond paying 1.5% is less, because why would I pay as much for your bond that only yields 1.5% when for the same risk I can get a bond paying 2%? The price difference on your 1.5% bond widens and your bond is worth less and less the higher interest rates go.

Now, the value of your bond only matters if you plan to sell the bond before it matures. But, if you plan to hold onto it until it matures, then the value of the bond doesn't matter. But, let's be honest, who wants to hold a bond is paying 1.5% when they could own one that pays 3% with the same risk profile?

So in 2017 you are going to want to sell bond ETF's unless they are funds that buy and hold bonds until maturity. Any fund that regularly trades bonds are going to have high fees and most likely lose a lot of money due to likely selling their bonds at a lower price than what they paid for them.

What To Watch

One industry that has certainly been on a roller coaster ride over the last few years is oil and gas. The $100 barrel oil lead to industry innovation, which reduced costs, opened new field and increased supply. That all lead to lower prices, which also lead to lower oil and gas stocks, but that could change in 2017.

Recently the Organization for Petroleum Exporting Countries (OPEC) along with some other non-cartel producers announced production cuts. This has led to a pop in the price of oil, which has also lifted some of the oil and gas stocks. If the promised production cuts hold, demand will likely stay the same, but supply will fall and therefore the price of oil will move higher.

Sounds like an easy way to make money right? Well here are the problems. First, the members of OPEC who promised to cut production must uphold their promises. In the past, these promises have never been upheld for any meaningful period of time. Second, the higher oil prices will likely cause high-cost producers to re-enter the markets and begin pumping oil again. Most recent US rig count was the highest it had been in more than a year. And third, is demand needs to remain strong. While electric cars won't have a global impact on oil supply in 2017, they certainly could further down the road, especially with vehicles in the price and performance range as the Tesla Motors Inc. (NASDAQ:TSLA) $35,000 Model 3. But, global economic growth needs to continue in order for demand to remain where it is today.

A few of my favorite ETF's in this industry are the Spider S&P Oil & Gas Exploration & Production ETF (PACF:XOP), the Guggenheim S&P 500 Equal Weight Energy ETF (PACF:RYE), the PowerShares S&P SmallCap Energy Portfolio (NASDAQ:PSCE), and the Spider S&P Oil & Gas Equipment & Services ETF (PACF:XES).

Remember, while ETF's help you diversify your holdings, you should still avoid putting all your eggs in one basket.

Matt Thalman
INO.com Contributor - ETFs
Follow me on Twitter @mthalman5513

Disclosure: Matt Thalman owned shares of Tesla at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.