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5 Best Areas of Q3 of 2022 & Their Top ETFs

The third quarter of 2022 is just about to wrap up. The broader market posted a muted performance during this time frame mainly due to red-hot inflation, a super-hawkish Fed and the resultant rising rate worries. Central banks around the world have been on this path in recent days to tame inflation.

The Fed has hiked interest rates this year by 300 bps so far. Last week, Fed officials raised interest rates by 75 basis points for three times in a row and Chairman Jerome Powell indicated that policymakers were ready to digest the economic recession in order to tame inflation.

The S&P 500, the Dow Jones and the Nasdaq Composite have lost about 5.6%, 6% and 6.4%, respectively, in the past three months (as of Sep 23, 2022). The small-cap index Russell 2000 has lost 4.9%.

The European Central Bank (ECB) also raised interest rates by an unprecedented 75bps in its September 2022 meeting, following a 50bps rate hike in July, and matching expectations from most analysts. The ECB promised further hikes.

Among the latest rate hikes, the Bank of England hiked its key interest rate to 2.25% from 1.75% on Thursday and said it would intervene further if needed, despite the economy entering a recession. The BoE estimates Britain's economy to shrink 0.1% in the third quarter.

The Central Bank of Sweden too announced a 100 basis points hike in interest rates last week, saying that the inflation was too stubborn. Despite the 100-bps hike, the Riksbank is still behind its inflation target by 0.25%, which indicates further rate hikes. The Swiss central bank also hiked rates by 75 basis points to 0.5% Thursday. The move brought an end to an era of negative rates in Europe.

Against this backdrop, below, we highlight a few ETF areas that won in the third quarter.

Emerging Markets (Brazil & India)

iShares MSCI Brazil Small-Cap ETF EWZS – Up 15.0%

iShares MSCI India Small-Cap ETF SMIN – Up 14.8%

Brazilian stocks gained thanks to a pickup in commodity stocks, upbeat macroeconomic data and strong corporate earnings. Domestic unemployment in Brazil dropped to their lowest levels since 2015, per tradingeconomics.

India’s stock market has outperformed the S&P 500 this year. India’s economy expanded 13.5% year over year in the second quarter of 2022, the maximum in a year but less than market forecasts of 15.2%.India’s economic performance has proved to be better than its peers, as the growth recovery has been robust while inflation has increased by much less than in other economies, per Barclays (read: India ETFs Beat S&P 500: More Upside In the Cards?)

MLPs

Global X MLP ETF MLPA – Up 14.6%

ETRACS Alerian MLP Infrastructure Index ETN Series B MLPB – Up 14.4%

Though oil prices declined massively in Q3 due to recessionary fears, MLP companies stood out. The midstream space has lower exposure to volatility in commodity prices. This is because midstream players generate stable fee-based revenues since the transportation and storage assets are being booked by shippers for the long term. Thus, their business model is relatively low-risk, signifying considerably lower exposure to both oil and gas price and volume risks. Plus, MLPs are high-yielding in nature.

Biotech

Virtus LifeSci Biotech Products ETF BBP – Up 14.4%

Virtus LifeSci Biotech Clinical Trials ETF BBC – Up 13.2%

The rally in biotech stocks that started in the middle of June is still in fine fettle. Per FT, hedge funds have started buying beaten-down biotech stocks since they believe that ultra-cheap valuations could revive M&A activity in the space. Many big pharma companies are looking to boost their drug pipelines through acquisitions.

Biotech stocks were huge beneficiaries of the pandemic as many of these companies were developing new vaccines and treatments for COVID-19, leading to a surge in IPOs and venture capital investments.

Clean Energy

First Trust NASDAQ Clean Edge Green Energy Index Fund QCLN – Up 14.1%

Virtus Duff & Phelps Clean Energy ETF (VCLN) – Up 11.3%

Clean-energy shares received a boost from the Inflation Reduction Act of 2022. The framework provided $370 billion to combat climate change and would be the biggest climate spending package in U.S. history. It included tax credits for wind, solar, hydrogen, and nuclear energy, and battery storage, among other things.

Uranium

Global X Uranium ETF URA – Up 11.8%

The war in Ukraine has accelerated the transition to alternative sources of energy, particularly in view of surging natural gas prices. Nuclear power is back in prominence as governments try to tackle climate change and reduce dependence on Russian fossil fuels. Uranium, used mainly in nuclear power plants, is one of the cleanest ways to produce electricity. However, nuclear energy currently makes up about 10% of the world’s electricity production (read: Global Energy Crisis Boosts Uranium ETFs).


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Virtus LifeSci Biotech Clinical Trials ETF (BBC): ETF Research Reports
 
Global X MLP ETF (MLPA): ETF Research Reports
 
First Trust NASDAQ Clean Edge Green Energy ETF (QCLN): ETF Research Reports
 
iShares MSCI Brazil SmallCap ETF (EWZS): ETF Research Reports
 
iShares MSCI India SmallCap ETF (SMIN): ETF Research Reports
 
Virtus LifeSci Biotech Products ETF (BBP): ETF Research Reports
 
Global X Uranium ETF (URA): ETF Research Reports
 
UBS ETRACS Alerian MLP Infrastructure Index ETN Series B (MLPB): ETF Research Reports
 
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