U.S. stocks are not starting 2015 on the most memorable of notes, but a lethargic start to the new year gives investors the opportunity to consider some already beaten up sectors at even more compelling valuations.
“Beaten up” applies to the energy sector, which was the worst performer in the S&P 500 last year. The Energy Select Sector SPDR (NYSEArca: XLE) was the worst performer of the nine sector SPDRs in 2014 and the only one to finish with a yearly loss. However, the energy sector now looks alluring on valuation. Along with the materials and telecom sectors, energy trades “at the lowest valuations on the basis of price-to-sales versus the previous five years,” said MKM Partners in a research note posted by Barron’s.
Although XLE and the Materials Select Sector SPDR (NYSEArca: XLB) have the look of 2015 rebound plays and sport attractive valuations, those ETFs along with the Industrial Select Sector SPDR (NYSEArca: XLI) are seen as vulnerable to a rising dollar. [ETFs Hoping for Dollar Reversion]
With January being the best month of the year on a historical basis for the U.S. Dollar Index, investors may want to look elsewhere for sector ETF ideas. [King Dollar Could Soar in January]
One destination could be the Financial Select Sector SPDR’s (NYSEArca: XLF). XLF, the largest financial services ETF, rose nearly 14% last year and the sector is not considered richly valued relative to the S&P 500.
Additionally, the financial services sector is poised to deliver more dividend growth in 2015. “While FactSet expects all 10 S&P 500 sub-sectors to report dividend growth next year, only financials (14.8 percent) and consumer discretionary (10.3 percent) sectors are expected to report double-digit growth in dividends,” reports Constance Gustke for CNBC.
“For long directional exposure through the first quarter of 2015, we like owning XLF March 26 strike, 30^ [delta]calls outright for 30 cents,” said MKM. [Banking on Bigger Dividends From Bank ETFs]
Among global ETF ideas for the first half of 2015, Latin America funds Friday are confirming the thesis that they will again be laggards. Much of that has to do with oil’s continued slide, but where there are losers on the back of lower oil prices, there are winners.
India ETFs were the stars of the BRIC quartet in 2014, including WisdomTree India Earnings Fund (NYSEArca: EPI), the largest India ETF. Investors are excited about the reforms promised by newly-elected Prime Minister Narendra Modi, but India’s economy is also seen as a major beneficiary of lower oil prices.
“The largest net importers of crude (excluding the U.S.) that stand to benefit from lower prices are China, Japan, India and South Korea. India has a particularly compelling mix of an accelerating economy, accommodative monetary policy and valuation that is at a discount to global equities (BSE Sensex Index versus MSCI World),” according to MKM Partners. [Best Asia ETFs for 2015]
With the next European Central Bank slated for Jan. 22 and speculation increasing that ECB President Mario Draghi will finally unveil a Federal Reserve-style quantitative easing package, investors can consider looking for ways to prepare for that announcement, if it comes.
MKM likes the iShares MSCI Germany ETF (NYSEArca: EWG), the largest U.S.-listed Germany ETF.
“We want to participate in potential upside via EWG using April expiration to capture the early March ECB meeting just in case the January outcome is light of expectations. In that expiry, we like EWG 29 strike, 33^ calls outright for 50 cents,” said the research firm.
EWG fell 12% last year.
iShares MSCI Germany ETF
Todd Shriber owns shares of XLF.