March Madness ETF Prediction and Sweet 16 Picks

The National Collegiate Athletic Association (NCAA) Men's Division I Basketball Tournament started last week and March Madness  is expected to linger for three weeks. The champion will be crowned on Apr 2 at Alamodome in San Antonio, TX. From the round of 64, the tournament will proceed to ‘Sweet Sixteen’ on Mar 22, followed by ‘Elite Eight’, ‘Final Four’ and ultimately the championship.

This sporting extravaganza fuels growth in various corners of the economy such as media, advertising, restaurants, hotels and airlines, giving boost to related stocks. The excitement surrounding the tournament and its impact on the stock world has led investors to look at ETFs that could act as a proxy for the game. Since the tournament has reached Sweet Sixteen, let’s start filling the brackets from this level (read: Basket March Madness Gains With These ETFs).

Similar to the four-region criteria of the real championship, we have chosen four factors, namely monetary policies, economy, fundamentals, and investment strategies. Then, we have shortlisted 16 ETFs that are popular in the respective segments and fit our criteria. Fortunately, each of these funds has a Zacks ETF Rank making our seeding easier. In case of a tie between ranks, we have considered the year-to-date performance in selecting the ETF qualifying for the next round.

Monetary Policies

United States SPY vs. Europe VGK – Currently, the United States and Europe are following diverging policies. The Fed has raised interest rates for the sixth time since the financial crisis and signals faster rate hike next year. On the other hand, the European Central Bank (ECB) will continue buying assets worth €30 billion per month until at least September 2018. Though both SPY and VGK have a Zacks ETF Rank #3 (Hold), SPY has a significant lead over VGK in terms of year-to-date performance.
Winner: SPY

Gold GLD vs. Dollar UUP – Gold and dollar move in opposite directions and are largely influenced by monetary polies. While higher rates will pull in more capital to the country, leading to appreciation of the dollar, it diminishes the yellow metal’s attractiveness since it does not pay interest like fixed-income assets do. Though both GLD and UUP have a Zacks ETF Rank #3, the former gets an upper hand over UUP in terms of year-to-date performance (read: ETFs & Stocks to Buy on Falling Dollar).
Winner: GLD

Economy

Global Market ACWI vs. International Market VEU – The global stock market has touched new highs on several occasions this year, defying all the economic and political challenges with international market leading the way. However, ACWI wins with a Zacks ETF Rank #2 (Buy)  compared with a Zacks ETF Rank #3 for VEU.
Winner: ACWI

Developed Market VEA vs. Emerging Market EEM – Though both funds have a Zacks ETF Rank #3, EEM stole the show having gained 5.1% so far this year versus a loss of 0.4% for VEA.
Winner: EEM

Fundamentals

Mega Cap DIA vs. Small Cap IWM – The Wall Street has completed its nine-year bull run and is expected to move higher, given strong corporate earnings and optimism surrounding Trump’s pro-growth policies. Weak dollar and earnings will lift mega caps, while tax reform is a huge boon for the small caps. DIA wins with a Zacks ETF Rank #1 (Strong Buy) against the Zacks ETF Rank #3 for IWM (read: 9 ETFs Winners From 9-Year Bull Run).
Winner: DIA

Value IWD vs. Growth QQQ –  Value stocks have been grabbing investors’ attention lately, given Trump’s protectionist stance, geopolitical tensions, and Washington turmoil. However, growth stocks also appear to be an excellent choice, given the strong economic fundamentals. QQQ, having a Zacks ETF Rank #2 has an edge over IWD with Zacks ETF Rank #3.
Winner: QQQ

Investment Strategies

Low Volatility USMV vs. Dividend VIG – Uncertainty and volatility lure investors’ toward a low volatility and dividend strategy. Here, VIG wins with a Zacks ETF Rank #2 against USMV with a Zacks ETF Rank #3.
Winner: VIG

Long-Term Treasury TLT vs. High-Yield Bond HYG – When rates rise, yields also rise. This puts pressure on Treasury bonds but raises the demand for high yield bonds to shield against rising interest rates. TLT and HYG each have a Zacks ETF Rank #4 (Sell), having delivered negative returns so far this year. However, HYG wins as it has shed just 1.8% compared with loss of 6.1% for TLT (read: 7 Ways to Play Rising Yields With Inverse Treasury ETFs).
Winner: HYG

Elite Eight (March 25)

Among the eight winning ETF teams, the six-month performance was used to decide the winner of each region.

Monetary Policies: United States vs. Gold –SPY emerges as the undisputed winner, defeating GLD by a wide margin of 5.8%.

Economy: Global Market vs. Emerging Market –EEM beats ACWI by 280 bps in the past six months.

Fundamentals: Mega Cap vs. Growth – QQQ outpaces DIA by nearly 500 bps

Investment Strategies: Dividend vs. High-Yield Bond – VIG wins having gained 9.6% over the past six months against a loss of 3.1% for HYG.

Final Four (March 31)

We come to the last four teams in this playoff tournament and the best in their specific regions. We now look at the trailing one-year performance to see who has the maximum momentum heading into the next level. In the matchups, we have United States versus Emerging market on one side and Growth versus Dividend on the other.

SPDR S&P 500 (SPY) versus iShares MSCI Emerging Markets ETF (EEM)

For this ETF faceoff, SPY represents United States and EEM  stands for the emerging markets. Let’s take a closer look at these funds before deciding on the winner:

SPY – This is the ultra-popular ETF with a total AUM of around $267.9 billion and average daily volume of 89.1 million shares. It tracks the S&P 500 index and holds 505 stocks in its basket with each holding less than 3.9% of the assets. The fund is slightly skewed toward information technology with one-fourth share while financials, health care, consumer discretionary and industrials round off the next four with double-digit exposure each. The product charges 9 bps in fees per year and has gained 15.6% over the trailing one-year period (read: U.S. Equity ETFs Tops Last Week's Asset Flow).

EEM – This fund tracks the MSCI Emerging Markets Index and holds 862 securities with each holding less than 6% of the assets. However, the product is tilted toward the information technology and financial sectors that account for one-fourth of the portfolio each. Among the emerging countries, China takes the top spot at 31% while South Korea and Taiwan round off the next two spots with double-digit exposure each. The product has AUM of $43.7 billion and trades in solid volume of 61.8 million shares per day. It charges 69 bps in fees per year from investors and has gained 24.7% in a year’s time.

Winner: Emerging market ETF wins and advances toward the final round to take on the winner of the Growth versus Dividend match.

PowerShares QQQ (QQQ) vs. Vanguard Dividend Appreciation ETF (VIG)

For this faceoff, QQQ represents growth and VIG represents dividend. Below, we take a closer look at these funds before deciding on the winner:

QQQ – This is one of the largest and most popular ETFs in the large cap space with AUM of $61.3 billion and average daily volume of around 35.9 million shares. It provides exposure to 103 largest domestic and international non-financial companies listed on Nasdaq by tracking the Nasdaq-100 Index. The fund is highly concentrated in the top three firms with a combined 30.2% share while other firms hold less than 5.2% of the assets. Further, information technology dominates the fund’s return at 60.9%, followed by consumer discretionary at 22.5%. It charges investors 20 bps in annual fees and has surged 28% in a year.

VIG – This fund follows the NASDAQ US Dividend Achievers Select Index, which comprises high quality stocks that have a record of growing dividend year over year. It holds 177 securities in the basket with none accounting for more than 5.2% share. However, it has a definite tilt toward industrials at 34% while consumer services, consumer goods and healthcare round off the next three spots. The product has amassed $27.6 billion in its asset base and trades in an average daily volume of about 717,000 shares. The fund charges 8 bps in annual fees and has gained 14.3% in the last year (read: 4 Safe Dividend Growth ETFs & Stocks for a Faltering Market).

Winner: Growth ETF wins to compete with Emerging Market ETF for the championship.

The National Championship

For the championship, let’s look at the performance of both ETFs over the past five years. QQQ has gained 144.2% compared with 18.1% gain for EEM. This suggests that in the ETF world, PowerShares QQQ (QQQ) will likely emerge as the winner of the 2018 March Madness championship based on our ranking system and its recent performance.

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