4 Best-Performing ETF Areas of Q4 That Still Show Promise

Wall Street has been upbeat in the ongoing fourth quarter, with the S&P 500 gaining about 5.4%, the Dow Jones adding 2.6% and the Nasdaq composite surging about 10.8% over the past three months (as of Dec. 24, 2024). The small-cap index Russell 2000, however, has advanced a moderate 1.6%.

The quarterly rally was more pronounced in November courtesy of optimism over potential tax cuts and a post-Presidential election rally triggered by Donald Trump’s victory. The Fed has enacted two rate cuts in the fourth quarter, one in November and the other this month (read: November Turns S&P 500's Best Month in 2024: ETF Area Winners).

Strong GDP Growth & Retail Sales

On the economic front, the U.S. economy has been in great shape. The economy expanded at an annual rate of 3.1% from July through September, driven by strong consumer spending and increased exports. The above-consensus retail sales growth in November further demonstrated economic resilience (read: Will Santa Claus Rally Set In for 2024? 4 Best ETF Areas to Explore).

Cooling Inflation

The annual inflation rate in the United States rose for a second successive month to 2.7% in November 2024 from 2.6% in October, in line with expectations. However, the rise was partly influenced by low base effects from last year, which indicates a tough comparison.

Otherwise, the PCE price index, the Fed’s preferred inflation gauge, showed an increase of just 0.1% from October and a 2.4% annual growth rate, both below expectations. This cooling inflation is a tailwind to keep consumer spending at a strong level.

December Emerging as a Milder Month

Despite the strength in November, December so far has emerged as a milder month for equities due to hawkish Fed cues for 2025 and an easing Trump bump. In the past month, the S&P 500 is off 0.2%, the Dow Jones has retreated 0.4% and the Nasdaq Composite has fallen 0.4%.

The downturn in the equity market from early December's highs stemmed from a cautious outlook by the Fed. The Fed now projects just two rate cuts in 2025, down from the earlier expectations of four, reinforcing a “higher for longer” policy approach that could weigh on the year’s final trading days (read: 4 Low P/E Momentum ETFs for an Uncertain Santa Rally).

Rise in Bond Yields in Q4

U.S. benchmark treasury yield was 4.59% on Dec. 24, considerably higher than 3.74% recorded at the start of the fourth quarter. This surge in bond yields has every reason to weigh on equities. A risk-on sentiment, a stronger greenback and hawkish Fed cues led to this rise in yields.

Winning ETF Areas of Q4 in Focus

Against this backdrop, below we highlight a few winning exchange-traded fund (ETF) areas that have won in Q4, carry a solid Zacks Rank #1 (Strong Buy) or 2 (Buy) and have enjoyed momentum over the past month. These high-momentum ETFs have the potential to excel further.

Consumer Discretionary

Consumer Discretionary Select Sector SPDR ETF XLY – Zacks Rank #2; up 15.8% over the past three months; up 5.3% past month

The consumer discretionary corner of the broad stock market has been an area to watch lately, given increased optimism during the holiday season. The fund is heavy (22.89% weight) on Amazon — a company which is in sweet spot during the holiday shopping season. Another key constituent of the fund — Tesla — has also been gaining on the Trump mania (read: Tesla Stock Hits All-Time High: ETFs to Ride the Momentum).

Internet

First Trust Dow Jones Internet ETF FDN – Zacks Rank #1; up 18.5% over the past three months; up 3.8% past month

Invesco NASDAQ Internet ETF PNQI –Zacks Rank #1; up 11.6% over the past three months; up 2.3% past month

These Internet ETFs have considerable exposure to the soaring “Magnificient-7” group — a famed cluster known for excellence in artificial intelligence (AI). Recently, Citi strategist suggested that the Magnificent Seven stocks could function as a defensive play in 2025 amid market uncertainty. Unwavering demand for AI and big tech’s cash flow strength are likely to drive these Internet ETFs (read: Mag 7 ETFs Look Unstoppable Heading Into 2025).

Large-Cap Growth

Schwab U.S. Large-Cap Growth ETF SCHG – Zacks Rank #2; up 10.6% over the past three months; up 4.0% past month

Vanguard Russell 1000 Growth ETF VONG – Zacks Rank #2; up 10.5% over the past three months; up 4.5% past month

Hopes of lower rates, chances of tax cuts in the Trump 2.0 era, strong earnings growth outlook, and the AI craze have been driving the rally in this segment. In particular, growth stocks tend to outperform in a trending market (i.e., a market characterized by a prolonged uptrend).

Semiconductor

SPDR S&P Semiconductor ETF XSD – Zacks Rank #1; up 9.9% over the past three months; up 5.7% past month

Invesco Semiconductors ETF PSI – Zacks Rank #2; up 7.5% over the past three months; up 5.1% past month

There has been immense growth in the chip or semiconductor industry this year. The chip industry is experiencing a significant boom, fueled by surging demand for advanced semiconductors in AI, 5G, electric vehicles and cloud computing (read: 6 Tech ETFs That Are Up At Least 40% in 2024).

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