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Khaosai Wongnatthakan Off to a good start It has been a good start for the new year, with good news on the inflation front stirring optimism that the Fed may not have to raise rates as high as once thought. The economic “soft landing” narrative got a boost from a healthy jobs report that included a smaller-than-expected rise in hourly earnings, one of the key metrics that drives Fed policy. For the first three weeks of January, the S&P 500 is up 3.5% and is now above its 200-day moving average. The NASDAQ Composite has done even better, up 6.4% in 3 weeks. Tech stocks are enjoying a rebound from a dismal 2022. Within the tech space, semiconductor stocks are flying. The SOXX ETF is up 10.8% in the last 3 weeks. NVDA is up 22.1%, TSM is up 22.2%, and AMAT is up 12.6%. Other sectors that are charging out of the gate are Communication Services, up 11.0%, Consumer Discretionary, up 8.1%, and Basic Materials, up 6.9%. The theme here is that the most out-of-favor segments of the market last year are the new darlings this year. Conversely, the best sectors last year are struggling to keep up with the broad market. Energy is up 3.3%, Utilities are down -1.8%, and Consumer Staples are down -1.9%. These trends are interesting but they are far from being sustainable with just three weeks of data behind them. My view is that investors may have jumped the gun by throwing money at last year’s losers. I think the next 3-6 months will be challenging for Tech, Materials, and Consumer Discretionary. They will probably do better in the second half of this year. The ETF universe In an effort to spot which areas of the market are hot right now, I turned to the universe of ETFs. There are more than 3,000 ETFs listed in the US alone, and more than 8,500 globally. For this article, I only considered the US listed offerings and eliminated the ones with less than a year in existence, and less than $200 million in assets under management (AUM). I also eliminated leveraged and inverse ETFs. As a result, I cut the list from 3,000 to 1,000 names. Next, I separated the equity funds from the fixed income funds. This article will be focused on the equity funds. I’ll leave the fixed income funds for a future article. On the equity side, there are 770 funds listed for trading on US exchanges. This gives us a wide assortment of countries, sectors, industries, and market niches to consider. The winners The hottest ETF on the list is surprising, at least to me. It’s the iShares MSCI Turkey exchange-traded fund (TUR), and it is up 79.4% over the last 12 months. The fund has large positions in Turkish financial giant Akbank, Istanbul-based retailer Bim and the parent company of Turkish Airlines. This ETF tracks the MSCI Turkey 25/50 Index, which measures the performance of the 25 largest and 50 most liquid stocks in the Turkish equity market. TUR is designed to provide investors with a diversified portfolio of Turkish stocks. Why is the Turkish equity market so hot? According to an article in CNN Business, “Turkey’s stock market has thrived because the country is doing something most others aren’t: Its central bank has been slashing interest rates to prop up consumer spending. Turkish President Recep Tayyip Erdogan wants to keep rates super low. He has even fired several central bankers in the past few years who refused to lower rates.” Chart 1. TUR Source: StockCharts Another country with a surging stock market is China. And the hottest part of the Chinese market is the internet industry. KWEB is an exchange-traded fund that tracks the performance of the KraneShares CSI China Internet Index, an index that provides exposure to Chinese companies that are engaged in the internet industry. The fund was launched in August 2014 and is managed by Krane Funds Advisors, LLC. The fund seeks to track the performance of the index by investing at least 80% of its total assets in the securities that comprise the index. It invests in companies in the internet services, advertising, e-commerce, and gaming industries in China. The fund is invested in 32 different Chinese internet companies. The fund seeks to provide investors with exposure to the Chinese internet industry in a cost-efficient and easy to access manner. The fund has a moderate expense ratio of 0.69%, making it one of the most cost-efficient ways to access the Chinese internet industry. The fund has seen strong performance since its October 2022 low and has outperformed the S&P 500 since then. The fund has generated a total return of 66% in the last 3 months, while the S&P 500 has returned only 7.5%. The fund has also seen a solid performance year-to-date, returning 15.4% versus 3.5% for the S&P 500. Chart 2. KWEB Source: StockCharts OIH is a passively managed exchange-traded fund designed to track the performance of the VanEck Vectors Oil Services 25 Index. The fund seeks to track the performance of 25 of the leading and most liquid U.S. and global oil services companies. The fund’s portfolio is composed of a variety of companies, including oil and gas exploration and production companies, oilfield services companies, oilfield equipment and product suppliers, and integrated oil companies. The fund is designed to provide investors with a low-cost, diversified way to gain exposure to the oil services sector. The OIH ETF has an expense ratio of 0.35%, which is lower than the average ETF expense ratio of 0.40%. It has a total return of 65.4% since its September 2022 bottom. Additionally, the fund has a 1-year return of 49.4%, and a 2-year return of 76.3%. Chart 3. OIH Source: StockCharts The Global X Junior Miners ETF (GDXJ) is an exchange-traded fund that invests in a variety of junior miners and explorers with operations in countries across the globe. The ETF seeks to track the performance of the Solactive Junior Miners Index, a benchmark that holds small-cap and mid-cap stocks of junior miners and explorers. GDXJ is designed to provide investors with exposure to the junior mining industry, which includes companies that explore, develop, and produce metals, minerals, and other natural resources. By investing in these companies, investors can benefit from the long-term growth potential of the junior mining industry. GDXJ holds a diversified portfolio of small- and mid-cap stocks from countries around the world, such as Canada, the United States, Australia, and South Africa. The fund is heavily weighted towards gold, as more than half of its portfolio is comprised of gold-focused stocks. Other metals and minerals in the portfolio include copper, silver, platinum, palladium, uranium, zinc, and potash. GDXJ is a relatively high-risk, high-reward investment, as junior miners and explorers tend to be more volatile than larger established miners. The fund is up 54.6% from its September 2022 bottom. Chart 4. GDXJ Source: StockCharts Final thoughts Is it too late to buy these surging ETFs? That depends on your time frame. Turkey has had a great run for the last 12 months but it had been in the doldrums for several years. This could be the start of a multi-year bull run. But, if you’re looking for a quick trade, there is a significant risk of a correction that could take the TUR ETF down 10-20% or more. The same could be said about KWEB, the China internet ETF. It is coming off of a long stretch of underperformance, so investors with a longer time frame might be buying into a multi-year bull run. OIH, the energy services ETF, has had a great two years, but it has performed poorly for the prior three years. I think this one has more upside. GDXJ, the junior gold miners ETF, is just starting to move higher after several years of underperformance. If you are bullish on gold, this one is a good way to play it for maximum upside. Are you looking for more high quality ideas? Consider joining The ZenInvestor Top 7, my Marketplace service. The Top 7 is a factor-based trading strategy. Its screening algorithm prioritizes reasonable price first, then the momentum, and finally projected earnings growth. The strategy produces 5-7 names, and rebalances every 4 weeks (13 times per year). The goal is to catch healthy companies that have gone through a rough period, and are now showing signs of making a strong comeback. Join now with a two week free trial. Original Post Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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