As the U.S. economy bravely trumped all difficulties at home and abroad, 2014 was another great year for the country’s stock market. The S&P 500 posted the third consecutive year of double-digit gains of 11.4% while Dow Jones Industrial Average added 7.5%. With this, the U.S. bull market is strongly moving ahead to celebrate its sixth anniversary on March 9, 2015.
This is especially true given that the economy is growing at a faster rate in over a decade and is on track for the strongest annual job growth since late 1999. While lower oil prices, better job markets, improving business conditions, rising consumer confidence, and low interest rates should continue to benefit stocks in 2015, the expected first interest rates hike in a decade, an aging bull market, and a strong dollar might act as headwinds.
The slowdown in China and other key emerging economies, turmoil in Russia, a struggling Europe, and recession in Japan is also likely to derail the stock market rally this year. Given the global growth concerns and deflation fears, it will be prudent for investors to remain invested in the domestic market rather putting money in international bourses.
For those investors, we have highlighted five best picks for 2015 that look to outperform and cost less than many other products. Additionally, these funds have either a Zacks Rank 1 (Strong Buy) or 2 (Buy) with a Medium risk outlook.
Vanguard Financials ETF (NYSE:VFH)
The financials sector has strongly rebounded from the great recession with much healthier balance sheets, robust bank profits, improving credit quality and better risk management. The strengthening economy will continue to boost earnings and increase dividend payouts. Further, a rising interest rate scenario would be highly profitable for the financial entities like banks, insurance companies and discount broker sites, as a steeper yield curve assists banking institutions in making more money from a bigger spread between short-term rates for deposits and longer-term rates for loans.
One of the popular and liquid ways to play financials in basket form is with VFH. This product sees close to 287,000 shares change hands each day, while assets under management are pretty impressive at roughly $2.7 billion. It closely follows the MSCI US Investable Market Financials 25/50 Index with tracking error of just 0.04%. Holding a broad basket of 566 stocks in its portfolio, the fund has a moderate concentration risk of 13.25% and expense ratio of 0.12%. The ETF gained 14% last year and has a Zacks ETF Rank of 1.
Vanguard Dividend Appreciation ETF (NYSE:VIG)
Though the U.S. market is on the positive trajectory, investors will continue to see bouts of volatility heading into 2015 as the Fed moves closer to normalization of monetary policy. Geopolitical risks may further add to the uncertainty. This will likely keep investors’ defensive –focusing on dividend stocks that provide stability in the form of payouts and safety in the form of mature companies that are less vulnerable to the large swings in the stock prices.
As a result, VIG seems an interesting choice for 2015. This is the largest and most popular ETF in the dividend space with AUM of $21.4 billion and average daily volume of about 826,000 shares. The fund provides exposure to the high quality stocks that have a decade-long record of increasing dividends by tracking the NASDAQ US Dividend Achievers Select Index. It holds 163 securities in the basket with tracking error of 0.03% and concentration risk of 12.4%. Expense ratio came in at 0.10%. The fund added about 10% in 2014 and has a Zacks ETF Rank of 1.
Guggenheim Russell Top 50 Mega Cap ETF (NYSE:XLG)
While small caps tend to perform better in a growing economy and an accommodative monetary policy, a rising interest rate environment no doubt favors mega cap stocks. This is because most of the mega cap companies have huge cash piles on their balance sheets and face no financing problem in a rising rate environment. As such, risk-adverse investors prefer larger, stable, well-known companies over smaller riskier players.
While there are several options in the large and mega cap ETF space, XLG having a Zacks ETF Rank of 2 looks to be compact play. This fund tracks the Russell Top 50 Mega Cap Index with a low tracking error of 0.09% and holds a basket of 52 largest stocks with a lower concentration risk of 10.6%. It charges 20 bps in fees and expenses annually from investors and sees light volume of under 22,000 shares a day. The ETF is up 11.4% in 2014.
Health Care Select Sector SPDR Fund (ARCA:XLV)
After an enormous run in 2013, the health care space has emerged as a strong winner in 2014 as well. This trend is likely to continue in 2015 thanks to strength in biotechnology and pharmaceuticals firms as well as encouraging industry trends. In particular, a merger and acquisition frenzy, ever-increasing health care spending, an insatiable demand for new drugs, an aging population, a spending boom in emerging markets and Obamacare will continue to fuel growth in the sector.
Investors could tap this growing sector with State Street’s XLV, which tracks the S&P Health Care Select Sector Index with tracking error of 0.04%. The fund has accumulated $12.1 billion in AUM and sees heavy volume of around 8.4 million shares per day. The ETF has one of the lowest expense ratios of 0.16% and holds 57 securities with moderate concentration risk of 17.19%. The fund returned over 25% last year and has a Zacks ETF Rank of 2.
Vanguard Mid-Cap ETF (NYSE:VO)
Though the large and mega cap space provides no growth in the portfolio and investing in small cap stocks come with higher risk, mid caps are arguably safer options allowing growth and stability in a portfolio simultaneously. Further, these middle-of-road securities could be better positioned if political turmoil or global economic issues creep into the picture. As such, these have the potential to move higher in turbulent times when compared to large and small caps.
One of the popular and liquid ways to play in the mid cap space is with VO. This product sees close to 345,000 shares change hands each day, while assets under management are pretty impressive at roughly $10 billion. It closely follows the CRSP US Mid Cap Index with tracking error of just 0.03%. Holding 371 stocks in its portfolio, the fund has concentration risk of less than 3% and expense ratio of 0.09%, reflecting excessive diversification and low product cost. The ETF gained 13.8% in 2014 and has a Zacks ETF Rank of 2.