Are Q1 ETF Toppers Healthy Enough For Further Run In Q2?

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Includes: ACWI, AIRR, BBH, EEM, EPI, EWZS, FEMS, IBB, KWEB, SCIF, SCIN, TLEH, VGK
by: Zacks Funds

U.S. equities were in fine fettle in the first quarter of 2017 barring some jitters in March. The S&P 500-based ETF SPY, Dow Jones-based ETF DIA and Nasdaq 100-based QQQ added in the range of 4.5% to 6%. In particular, the S&P 500 logged its best quarterly gain since 2015 and the Nasdaq experienced its best quarter since 2013.

Trump trade was mainly responsible for such impressive equity movements, though uncertainty surmounted lately over the extension of the rally. Some of Trump's pro-growth promises are likely to face lack of political support.

Development on the global front looked up even more in Q1 with the iShares MSCI ACWI (All Country World Index) Index ETF (NASDAQ:ACWI)adding 6.9% so far this year (as of April 3, 2017), emerging market ETF, iShares MSCI Emerging Markets ETF (NYSEARCA:EEM),jumping 13.1% and Europe-oriented fund, Vanguard FTSE Europe ETF (NYSEARCA:VGK),advancing 7.1%.

In such a scenario, it is wise to go for a health check-up of some top-performing ETFs of Q1 on World Health Day and find out if these are still sturdy enough for further run.

India

India ETFs are on a tear this year on economic optimism. Solid GDP data defying demonetization, pro-growth prime minister's party's win in some key states, implementation of goods and services tax or GST from July, a weaker greenback and subdued U.S. Treasury bond yields driving foreign inflows benefited India investing.

With most of the tailwinds still in place, investors can very well play India ETFs in Q2. Indian stocks touched a two-year high in early April. Foreign investors purchased a net $8.57 billion worth of Indian shares and bonds in March.

However, after a stellar Q1, some India ETFs boast rich valuation. So, investors can land up on those with relatively low P/E.

WisdomTree India Earnings ETF (NYSEARCA:EPI)- Up 20.74% (YTD); P/E - 14.55x

VanEck Vectors India Small-Cap Index ETF (NYSEARCA:SCIF)- Up 32.1% (YTD); P/E - 16.77x

Columbia India Small Cap ETF (NYSEARCA:SCIN)- Up 33.0% (YTD); P/E - 14.24x

Biotech

The biotech sector had a stellar run last quarter driven by solid earnings and Trump's plans to reduce drug regulations and push for faster drug approvals. The possibility of increased M&A activity, drug launches, cost-cutting efforts, an aging population, higher demand from emerging markets and rising health care spending also favored the sector.

However, Biotech was deep in the red on April 5 as the Fed indicated a reversal of QE sooner than expected. So, it is better to stay away from biotech if rates stage an uptrend. Otherwise these funds may prove beneficial ahead. Below we highlight ETF choices that have better chances of outperforming.

iShares Nasdaq Biotechnology ETF (NASDAQ:IBB)- Up 8.3% (YTD); P/E - 19.6x

VanEck Vectors Biotech ETF (NYSEARCA:BBH)- Up 12.6% (YTD); P/E - 15.09x

Brazil, China & Broader Emerging Market

Brazilian stocks and ETFs have been on a tear this year. The reason for this was successive rate cuts by the Brazilian central bank. Hopes of new reforms that can shore up the country's recession-stricken economy after the impeachment of president Dilma Rousseff, commodity strength and easing inflationary pressure perked up Brazil ETFs.

However, though the Brazilian economy is on its way to improvement, rich valuation and higher greenback may come in the way of Brazil investing in Q2. Small-cap Brazil ETF, iShares MSCI Brazil Small-Cap ETF (NYSEARCA:EWZS), which is up about 22% so far this year, lost about 5.7% in the last one month (as of April 5, 2017).

However, investors can continue trying other soaring corners of the broader emerging markets. Funds like FlexShares Currency Hedged Morningstar EM Factor Tilt Index Fund (NYSEARCA:TLEH)(P/E - 16.57x) can be good bets at this moment. TLEH is up 8.8% so far this year (as of April 5, 2017).

Investors should note that First Trust Emerging Markets Small Cap AlphaDEX ETF (NYSEARCA:FEMS)has added over 21% so far this year, which is still going strong but may face some overvaluation issues.

China is also a strong candidate in the emerging market bloc. However, with stellar gains recorded in Q1, several analysts now expect Q2 to be lukewarm for China equities and ETFs. Tightening of monetary policy and liquidity as well as chances of further yuan depreciation in the wake of U.S. rate hikes compelled analysts to think on these lines.

Still, KraneShares CSI China Internet ETF (NYSEARCA:KWEB), which has added about 22% this year, is in great momentum stepping into Q2.

Industrial

Though the Trump rally seems to have passed its best period, industrial stocks can see a few more days of bull run. The U.S. manufacturing sector is also in decent shape right now. Global economic improvement also point to an expected uptick in demand. The interest rate backdrop also remained at subdued level. All these many be beneficial to the industrial ETF, First Trust RBA American Industrial Renaissance ETF (NASDAQ:AIRR).

AIRR gained over 17% in the last six months (as of April 5, 2017) but is up 0.42% so far this year. So, investors can dip their toe into the fund now as it has opened up a buying opportunity.

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