XLI Industrial Select Sector

2013 was obviously a great year for the markets, as a better economic outlook propelled stocks sharply higher. Pretty much every sector was in the green for the time frame, leading to high hopes for the New Year.

However, the start of 2014 hasn’t been too kind to investors, thanks to the weak jobs numbers, earnings worries, and concerns over bond rates. These issues have kept a lid on market returns in the first half of January, and have led some investors to worry if this year will fall flat.

While it is still way too early to tell, it is important to note that a few market segments are still soaring, and appear well positioned for further gains this year as well. That is because they are zeroing in on some of the strongest stories in the current economic environment, and do look to have strength later on in the year too (see Best ETF Strategies for 2014).

Below, we highlight three sectors that have outperformed to start the year and could be poised to beat out the market in 2014. And best of all, each member of the trio has a top Zacks ETF Rank, further underscoring their potential to outperform this year. So before you panic about the slow start, consider any of the following funds as ways to get through this January market slump in great shape:

First Trust Industrials/Producer Durables AlphaDEX Fund (FXR)

Thanks to strong automobile demand, and an increasingly healthy manufacturing sector, the industrial segment has been outperforming the broad market to start the year. Plus, this relatively cyclical corner of the market has been easily outperforming the S&P 500 over the past six months too, suggesting it has strong momentum.

While broad plays may offer solid exposure to the surging U.S. manufacturing and production sector, FXR and its use of First Trust’s AlphaDEX methodology could be a winning way to go. That is because this approach evaluates stocks on a number of criteria, only selecting the best companies for inclusion in the index (read 3 ETFs to Profit from the Manufacturing Upswing).

The approach does help avoid a market weighted approach, though it does add to total costs. This has clearly been a winning strategy though, as the fund has added about 3.2% so far in 2014, while it has gained roughly 22.8% in the past six months, enough to put it well ahead of the more popular XLI for both time frames.

PowerShares Dynamic Biotechnology and Genome Fund (PBE)

Although there was some choppiness in Q4 for the biotech sector, 2014 has already proven to be a boom time for the surging space. Strong drug trial performances, hopes of M&A activity, and more interest in the segment are combining to boost ETFs tracking the space.

While there are a number of options in this corner of the market, PBE is an intriguing pick due to its top Zacks ETF Rank, and diversification across market capitalization levels. While some might focus in on giant firms like Biogen, PBE uses an equal weight approach which ensures that just one-third of the portfolio goes to large caps, giving the fund a small cap growth focus (read Top Biotech ETF in Focus: PBE).

This has definitely been a winning strategy as small caps have seen promising results on drug trials, while many are intriguing M&A takeover targets as well. This has already helped to boost PBE’s price to start 2014, as it has added more than 10% to start the year, while it has soared by over 27% in the past six months.

First Trust Nasdaq Clean Edge ETF (QCLN)

After soaring for much of 2013, clean energy investments tumbled to end the year, leading many to wonder if the boom was over. However, if recent trading has been any guide, the party is just getting started as many clean tech segments such as solar power have received solid Zacks Industry Ranks suggesting that there is still plenty of room to grow for this small, but increasingly important sector.

While there are a number of ways to focus in on clean tech, a broad play—which isn’t too concentrated in solar—may be a great bet. This can be done with QCLN, an ETF that holds about 45 stocks and has holdings ranging from solar companies like FSLR, to tech firms like CREE and LLTC, to electric consumer product makers like TSLA.

The fund definitely has a small and mid cap focus, as just 16% of the portfolio goes to large cap stocks. It also has a big growth component, so volatility could be high in this fund which has added 6% in 2014, and has jumped by 23.6% in the past six months (see all the Alternative Energy ETFs here).

Bottom Line

Although broad markets might be treading water to start 2014, there are plenty of corners of the market which are posting solid gains. In particular, the biotech, clean energy, and industrials segments are seeing strength in their share prices, and are easily outperforming the S&P 500 over the past few weeks.

Thanks to this strength in what has otherwise been a sluggish environment, coupled with a strong outlook, these might be names to watch as we push further into 2014. So if you are looking for some ETFs that are likely to crush the market this year, definitely consider the aforementioned funds, as they are already off to a good start, and could be poised for more solid trading in the months ahead as well.

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Author is long PBE

 
FT-INDL/PROD (FXR): ETF Research Reports
 
PWRSH-DYN BIO (PBE): ETF Research Reports
 
NASDAQ-CL EDG G (QCLN): ETF Research Reports
 
SPDR-SP 500 TR (SPY): ETF Research Reports
 
SPDR-INDU SELS (XLI): ETF Research Reports
 
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