The NCAA 'Sweet 16' Of ETFs: Who Wins?

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Includes: ACWI, CARZ, EWG, EWN, EWQ, EWU, GLD, ITA, IWD, IWM, KRE, QQQ, SPY, TLT, UUP, XLV
by: Zacks Funds

The National Collegiate Athletic Association (NCAA) Men's Division I Basketball Tournament started last week, and March Madness will fill the air for three weeks. Fans will see the champion being crowned on April 3 at University of Phoenix Stadium in Glendale, Arizona. From the round of 64, the tournament will proceed to "Sweet Sixteen" to be played on March 23, "Elite Eight," "Final Four," and, ultimately, the championship.

This sporting extravaganza fuels growth in various corners of the economy, such as media, advertising, restaurants, hotels and airlines, giving boost to related stocks. The excitement surrounding the tournament and its impact on the stock world has led investors to look at ETFs that could act as a proxy for the game. Since the tournament has reached Sweet Sixteen, let's start filling the brackets from this level.

Like the real championship, we have chosen four factors, namely Trump policies, Europe elections, fundamentals and investment strategies. These have lately been hogging investor attention. Then, we have shortlisted 16 ETFs that are popular in the respective segments and fit our four-region criteria. Fortunately, each of these funds has a Zacks ETF Rank, making our seeding easier. In case of a tie between ranks, we have considered the three-month performance in selecting the ETF qualifying for the next round.

Trump Policies

Bank (NYSEARCA:KRE) vs. Defense (NYSEARCA:ITA) - While Trump pushed up markets with his pro-growth plans, financials and industrials are the major beneficiaries. In particular, hopes of dismantling the Dodd-Frank Act gave a new lease of life to bank ETFs, and increased military spending sent defense ETFs higher. Though both KRE and ITA have a Zacks ETF Rank of 1 or "Strong Buy" rating, the latter gets an upper hand over KRE in terms of three-month performance.
Winner: ITA

Healthcare (NYSEARCA:XLV) vs. Auto (NASDAQ:CARZ) - The healthcare and auto sectors have been volatile given Trump's proposal of deregulation. The Obamacare Replacement Plan is the key challenge for the new administration in the healthcare sector. While the president plans to roll back the stringent vehicle fuel efficiency rules that Obama signed at the end of his administration, it will come at the cost of bringing the outsourced jobs back to the homeland. While both ETFs have a Zacks ETF Rank of 3 or 'Hold' rating, XLV has easily beat CARZ over the trailing three-month period.
Winner: XLV

Europe Elections

United Kingdom (NYSEARCA:EWU) vs. Netherlands (NYSEARCA:EWN) - While United Kingdom voted to leave the European Union (EU) last June, the process of Brexit is still underway and might take two years. Meanwhile, the victory of Dutch center-right prime minister Mark Rutte over anti-Islam Geert Wilders in an election last week has been widely celebrated, as it has offered relief to the populist wave across the EU. Both funds have a Zacks ETF Rank of 3, but EWN rose 11.4% over the past three months versus a gain of 6.6% for EWU.
Winner: EWN

France (NYSEARCA:EWQ) vs. Germany (NYSEARCA:EWG) - Both funds have a Zacks ETF Rank of 3, given that the French presidential election is coming up in May and voting in Germany is slated for September. The latest poll shows far-right National Front party leader Marine Le Pen, who wants France to leave the eurozone, with a four-point lead over French presidential rival Emmanuel Macron. Meanwhile, the latest INSA poll revealed the lead of Germany's center-left Social Democrats (SPD) party by 1% over Chancellor Angela Merkel's conservative Christian Democrat Union (CDU). The competition is tight, as EWG is winning marginally, having added 7.46% over the past three months compared with a gain of 7.35% for EWQ.
Winner: EWG

Fundamentals

Large Cap (NYSEARCA:SPY) vs. Small Cap (NYSEARCA:IWM) - U.S. stocks have scaled new highs since election, on a Trump-fueled rally. While small-cap stocks led the way higher in November and December, they are lagging their large-cap counterparts from a year-to-date look. Investors should note that Trump's massive stimulus policies should benefit small caps more, as these are closely tied to the U.S. economy and generate most of their revenues from the domestic market. As a result, IWM wins with a Zacks ETF Rank of 2 or 'Buy' rating against the Zacks ETF Rank of 3 for SPY.
Winner: IWM

Value (NYSEARCA:IWD) vs. Growth (NASDAQ:QQQ) - After the eight-year bull run, stocks appear expensive on many valuation metrics. Despite this, growth stocks are outperforming value stocks, as continued momentum is raising the appeal for riskier assets. As such, QQQ with a Zacks ETF Rank of 1 defeated IWD with Zacks ETF Rank of 3.
Winner: QQQ

Investment Strategies

Equity (NASDAQ:ACWI) vs. Long-Term Treasury (NYSEARCA:TLT) - Here, ACWI wins comfortably with a Zacks ETF Rank of 2 against a Zacks ETF Rank of 5 or 'Strong Sell' for TLT. This is because stabilizing oil and commodity prices, a rebound in currencies and global easing policies are fueling growth in the stock market. However, the Trump bump and fears of political instability have led to a crash in recent trading sessions, making investors jittery.
Winner: ACWI

Gold (NYSEARCA:GLD) vs. U.S. Dollar (NYSEARCA:UUP) - Both funds have a Zacks ETF Rank of 3, as the Fed increased interest rates for the third time in decade and had a less aggressive tone for the future path of monetary policy. However, GLD added 10.45% over the past three months, while UUP declined 3.49%.
Winner: GLD

Elite Eight (March 25)

Among the eight winning ETF teams, the six-month performance was used to decide the winner of each region that should advance to the Final Four.

Trump Policies: Defense vs. Healthcare - Here, ITA is the undisputed winner, defeating XLV by more than 1200 bps.

Europe Elections: Netherlands vs. Germany - Here, EWN beat EWQ by 170 bps in the past six months.

Fundamentals: Small Cap vs. Growth - Though both funds have been trending upward over the past six months, QQQ outpaced IWM by nearly 300 bps.

Investment Strategies: Equity vs. Gold - Here gain, ACWI is the undisputed winner, having gained 6.84% over the past six months against a loss of 6.85% for GLD.

Final Four (April 1)

We come to the last four teams in this playoff tournament and the best in their specific regions. We look at the trailing one-year performance to see which has the maximum momentum heading into the next level. In the matchups, we have Defense and Netherlands on one side and Growth versus Equity on the other.

iShares U.S. Aerospace & Defense ETF versus iShares MSCI Netherlands ETF

For this ETF face-off, ITA represents defense and EWN is the proxy for the Netherlands. Below, we have taken a closer look at these funds before deciding on the winner:

ITA - This fund offers exposure to 409 U.S. companies that manufacture commercial and military aircraft and other defense equipment. It follows the Dow Jones U.S. Select Aerospace & Defense Index and charges 44 bps in fees per year. The fund has accumulated $2.6 billion in AUM and trades in good volume of around 247,000 shares. It gained 27.24% over the trailing one-year period.

EWN - This fund tracks the MSCI Netherlands Investable Market Index and is home to a small basket of 58 companies. It is heavily concentrated on the top three firms that make for a combined 37.6% of assets. Consumer staples takes the top spot at 29% in terms of sector holdings, followed by at least 18% share each in industrials, financials and information technology. The product has AUM of $176.5 million and trades in solid volume of more than 222,000 shares per day. It charges 48 bps in fees per year from investors and gained 12.3% over the trailing one-year period.

Winner: Defense ETF wins and advances toward the final round to take on the winner of the Growth versus Equity matchup.

PowerShares QQQ vs. iShares MSCI ACWI ETF

For this face-off, QQQ represents growth and ACWI represents equity. Below, we take a closer look at these funds before deciding on the winner:

QQQ - This is one of the largest and most popular ETF in the large-cap space with AUM of $45.2 billion and average daily volume of around 21.1 million shares. It provides exposure to the 107 largest domestic and international non-financial companies listed on the Nasdaq by tracking the Nasdaq 100 Index. The fund is highly concentrated on the top two firms with a combined 20% share, while other firms hold less than 6.6% of assets. Further, information technology dominates the fund's return at 57.7% followed by consumer discretionary at 21.6%. It charges investors 20 bps in annual fees and has surged 22.1% over the past one year.

ACWI - This fund offers exposure to a broad range of international developed and emerging market companies by tracking the MSCI ACWI Index. It holds 1322 securities, with none making for more than 1.87% of assets. Financials, information technology, consumer discretionary and industrials are the top four sectors with a double-digit allocation each. In terms of country exposure, the U.S. takes the top spot at 51.2%, while other countries like Japan, the United Kingdom and China make a nice mix in the fund's basket. ACWI is the most popular and heavily traded ETF in the global space with AUM of nearly $6.5 billion and average daily volume of 2.1 million shares. Its expense ratio comes in at 0.33%. The ETF was up 15.2% in the last one-year period.

Winner: Growth ETF wins and will again match-up with Defense ETF for the championship.

The National Championship (April 3)

For the championship, let's look at the performance of both ETFs over the past five years. ITA gained 139.4%, compared with a 106.7% gain for QQQ. This suggests that in the ETF world, ITA will likely win the 2017 March Madness championship, based on our ranking system and recent performances.

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