Institutional ETF themes to watch in 2019

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Exchange Traded Fund. Trade Market ICO IPO Financial Technology Business Investment concept. © semisatch /123RF Stock PhotosWhile the bull market may not be over, more headwinds are on the way for U.S. equity markets over the next year — one of the themes investors can use exchange-traded funds to capture, according to a report by BMO Global Asset Management.

Overall, the U.S. market should see moderate upside for the year, said Brian Belski, chief investment strategist at BMO Capital Markets, in the report.

As for Canada, financials are a key theme managers are looking to capture. Jason Shutt, managing director for equity derivatives at BMO Capital Markets, noted growth numbers have been somewhat lacklustre, but other indicators are encouraging, including steady dividend growth.

Currently, Canadian banks are trading lower than long-term averages, which make them attractively priced, and markets predict they’ll outperform on earnings growth, said Shutt. He highlighted one ETF that equally weights the big six Canadian banks, noting the advantage of diversifying to gain pure sector exposure as opposed to an allocation to one bank in particular.

Rising interest rates indicate a positive outlook for some Canadian financials, specifically the big banks and life insurance companies, said Camilo Gil, executive director of ETF trading at CIBC Capital Markets, in the report.

Capturing the oil and gas market through an ETF is an attractive play this year, noted Tea Galli, an ETF trader at RBC Capital Markets, in the report. While enthusiasm for the sector has been dampened lately by adequate supply from countries outside the Organization of the Petroleum Exporting Countries, as well as general deteriorating interest from the investor community, there are arguments for a rally, she said.

Structural changes in the Chinese oil market, along with growing demand and potential policy shifts within the OPEC could all bolster the industry. The OPEC has agreed to a production cut, starting in 2019, while China’s demand for gasoline, as opposed to distillate, is growing as it continues to move from an industrial to a consumer-driven economy, said Galli.

Looking further afield, international equities are also an interesting play, as opposed to U.S. stocks, which have been boosted by extremely strong earnings in the past few years, said Hugo Ste-Marie, director of portfolio and quantitative strategy at Scotia Capital Inc. The effect of major U.S. corporate tax cuts wearing off, as well as a weakening U.S. dollar could result in weaker gains in the coming year, so investors can look to international stocks trading more cheaply, he said.

On the emerging markets side, India could prove especially interesting for 2019, with some acceleration visible within India’s Sensex index, while broader global markets experienced weakness at the end of 2018, noted Javed Mirza, quantitative and technical analyst at Canaccord Genuity Corp.

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