ETF Week Ahead Preview: Trying To Hold These Gains

Thanks to some assistance from major central banks (what else drives markets these days?), U.S. stocks rallied Friday with the S&P 500 gaining 1.1 percent to cap a 2.4 percent weekly surge. That strong weekly performance was enough to lift the benchmark U.S. index back into positive territory on a year-to-date basis.

On Friday, the People’s Bank of China (PBoC) surprisingly pared interest rates, news that arrived a day after the European Central Bank (ECB) set the stage for more quantitative easing following its December meeting. Those headlines also set the stage for some marquee exchange traded funds to watch in the week ahead.

The WisdomTree Europe Hedged Equity Fund HEDJ is among the predictable beneficiaries of added ECB stimulus and this year's top asset-gathering ETF reflected as much during the just completed trading week. HEDJ gained nearly 2.2 percent on Friday on volume that was approximately 70 percent above the daily average to cap 5.2 percent weekly gain. 

HEDJ has a small-cap counterpart, the WisdomTree Europe Hedged SmallCap Equity Fund EUSC, that against the backdrop of more ECB stimulus, merits consideration as well. EUSC, one of this year's most successful new ETFs, rose 3.6 percent last week.

Prior to the just finished week, currency hedged ETFs had been dithering in terms of performance, but had remained popular among investors. And issuers. Some new currency hedged ETFs debuted last week and they look well-timed as plays on the PBoC's continued efforts to weaken the yuan. On Wednesday, the CSOP MSCI China A International Hedged ETF CNHX and the Deutsche X-trackers CSI 300 China A-Shares Hedged Equity ASHX became the first China currency hedged ETFs available to U.S. investors. 

Getting back to things stateside, third-quarter earnings season is in full bloom and that means several well-known ETFs will be tested in the days ahead. Next week, four of the top 10 holdings in the Energy Select Sector SPDR XLE, a quartet combining for over 28 percent of the largest energy ETF's weight, step into the earnings confessional. We're not calling it, but the potential is there for some upside surprises simply because the energy sector's third-quarter earnings bar has been set so low.

Another ETF that will be tested by a spate of earnings reports in the week ahead is the iShares Global Healthcare ETF IXJ. Though it is a global ETF, nearly two-thirds of IXJ's weight is allocated to U.S. stocks. At least 20 percent of the fund's weight, both U.S. and foreign companies, deliver earnings updates next week.

As we alluded to Friday, master limited partnerships (MLPs) and the ETFs that hold those once popular income-generating securities have fallen on hard times. That misfortune extended last week as seven of the 10 worst-performing non-leveraged ETFs were MLP funds, so this is an asset class that bears monitoring. When it is time to be long is another story altogether.