Top Performing ETFs Of 2014 And 3 Great Picks For Next Year

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Includes: ASHR, CAFE, CHNA-OLD, FBT, IAI, INCO, IYC, JO, OIH, PSI, SCIN, SMIN
by: Zacks Funds

Stocks started off the year with a pretty solid performance, as the S&P 500 posted a gain of about 6% in the first half of the year. With a move like that and few worries on the horizon, many thought that another double digit performance was in store for markets.

However, the second half of the year wasn't nearly as favorable, as investors saw a number of issues crop up from Russian worries and an oil plunge, to Fed concerns and European stagnation. However, with a recent surge, we are back on pace to see growth around 10% if we are lucky for the YTD time frame.

With that being said, many segments saw huge divergences from this roughly 10% gain for the year. In fact, for the SPDR sectors, energy (NYSEARCA:XLE) has slumped close to 13% in the year-to-date period, while both health care (NYSEARCA:XLV) and utilities (NYSEARCA:XLU) posted returns in the 22%-23% range for 2014.

Clearly, the correct segment had a huge impact this year, and arguably this was an exceptionally important year for sector selection given how wide the differences were this time around.

And while XLU and XLV led the way for the major sectors, some of the more specialized segments had even better years. Take a look at some of these big 2014 winners, which all have added more than 30% in the time frame:

Commodities

Overall, it has been a pretty weak time to be in commodities. The biggest story this year has obviously been oil, as black gold has crashed this year. And while this commodity has led the way on the downside, there has actually been a strong performer too; coffee.

The two ETNs tracking coffee, the iPath Dow Jones-UBS Coffee ETN (NYSEARCA:JO) and the iPath Pure Beta Coffee ETN (NYSEARCA:CAFE), have both added more than 45% so far in 2014. This huge jump in an otherwise down year came to us from Brazil, as a major drought in this top producer has pushed prices far higher this year.

International

Global markets were another area that many investors probably wanted to avoid in 2014. Key emerging markets slumped, while any nation related to oil had a difficult time as well. Two countries did see some standout performances though, as both China and India led the way higher for international markets in 2014.

Indian ETFs surged thanks to politics, as the election of Modi and hopes of pro-growth policies sent Indian stocks sharply higher. The two India small cap funds on the market, the iShares MSCI India Small Cap Index ETF (BATS:SMIN) and the EGShares India Small Cap ETF (NYSEARCA:SCIN) both saw gains of about 40%, while the EGShares India Consumer ETF (NYSEARCA:INCO) put up a similar performance too.

For China, it wasn't just any Chinese fund that saw a jump, as it was the A-Shares products that surged thanks to the opening of a link between Mainland and Hong Kong investors which allowed for more purchases of A-Shares securities. This increased supply of investors was great news for ETFs like the PowerShares China A - Share Portfolio ETF (NYSEARCA:CHNA-OLD) or the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (NYSEARCA:ASHR) as both of these gained more than 40% on the year, largely thanks to the past month and the 20%+ gains seen in the time frame.

High Tech

A number of technology-related sectors also had a strong showing on the year, Adding close to 40% in both cases. The examples here come to us from the First Trust NYSE Arca Biotechnology Index ETF (NYSEARCA:FBT) and the PowerShares Dynamic Semiconductors Portfolio ETF (NYSE:PSI) segments.

Biotech rode a wave of M&A activity and strong demand to a solid performance this year. There was broad based strength in this sector, and it really continues a long running bullish trend for this important corner of the health care market.

PSI, on the other hand, was a bit of an outlier, easily beating its semiconductor counterparts on the year. This ETF has held up better than most in the recent turmoil, while the equal weight focus along with the Intellidex security selection clearly led to some serious outperformance in 2014 for this fund.

Looking Ahead

While that is great for 2014, some investors are probably asking what's ahead for markets and which sectors should be focused on this time around. Below, we take a look at three such segments which should be on your radar for 2015 trading.

These selections are primed for a bounce back, or they are looking to ride solid trends in the New Year. Either way though, both types should result in big gains for investors, and are worth a closer look heading into 2015:

Consumer

Lower oil prices are great news for the consumer market, as it basically acts as a tax cut that puts more money into everyone's pockets. And with strong consumer confidence and a solid housing market, the spending will be coming to a number of consumer discretionary companies.

An overlooked way to play this segment is with the iShares U.S. Consumer Services ETF (NYSEARCA:IYC). This broad product as a modest focus on retail names, but it also has media companies, restaurants and travel-oriented companies (Delta Air Lines, Inc. (DAL), Priceline Group Inc. (PCLN)) too.

Currently, investors are seeing solid rankings for a number of these segments as seven of the top 100 industries (out of more than 250 in total) are in the retail market. Restaurants also crack the top 100, while air travel, though not a big component, is in the top 10% from an industry rank look as well.

This should give the fund a nice mix of holdings and allow investors to play a consumer boom in a number of different ways. After all, in total, IYC has close to 190 companies and with no more than 5% in any one firm, investors are bound to get broad exposure to this space which could lead in 2015.

Financial

Financials are an extremely interesting play right now given the prospect of rising rates, but also the more volatile (though still strong) market. Rising rates would boost income for banks, insurance companies and discount broker sites, while the more volatile though improving market bodes well for exchanges and those with large investment portfolios.

Either way, it seems as though financials could see a nice run, and one way to play this trend is with the iShares Broker Dealer ETF (IAI). This fund focuses on investment companies like Goldman Sachs, exchanges like the CBOE (NASDAQ:CBOE), and then brokers such as Charles Schwab (NYSE:SCHW).

These segments all have pretty solid industry ranks and could be well-positioned for strength in the months ahead. Investment Brokers and Bankers both have a top 25% rank, while the exchanges are in the top 5%, so it is pretty hard to argue with the earnings estimate trend in this segment which looks to benefit no matter what happens to rates in 2015.

Energy

This last one is an extremely bold play, and it probably isn't one you want to jump into just yet. However, the energy sector has been extremely beaten down as of late and a contrarian investor has to think that a bounce back will happen next year. After all, the space pretty much collapsed in a matter of months and it isn't like the oil industry is going to be obsolete any time soon, suggesting longer-term investors may have some bargains on their hands in this space.

One interesting product to take a look at is the Market Vectors Oil Services ETF (NYSEARCA:OIH). This fund has lost close to 40% in the past six months, but should oil prices stabilize and improve later next year, this massive loss will likely be a distant memory. Some analysts have the same line of thinking on this sector too, at least if you take this recent note in Barron's, from RBC analyst Kurt Hallead, into account:

We recommend increasing weightings/exposure to oil service stocks heading into 2015. We believe the reward prospects over the next 18mos outweigh the prospective risk over the next 3 months. This view is predicated on an expectation that oil prices will start to improve in 2H15 and that oil service stocks typically discount this move by 6-9 months.

Once again, it is important to point out that ranks for this space are awful right now, and that it is probably too early for this play for all but the most intrepid investors out there. But, once we start to see some positive momentum in both earnings and oil prices, this could be a very interesting pick for investors in 2015.