Christmas isn’t Christmas without a tree. While the evergreen never fails to bring in cheer to the most lonesome of hearts, we decided to do something very different this year – build a tree with the choicest of ETFs of the season (see: all the Categories ETFs here).

A Christmas Tree of ETFs

Let’s build the base first, which is the most valuable of all for investors, and of course where all the gifts are to be found. And what’s more fitting than the broad market ETF SPDR S&P 500 (SPY – ETF report), which tracks the major U.S. benchmark – the S&P 500 index – to give a solid foundation to our tree. It holds 506 stocks in its basket that are widely spread out across a number of sectors and securities. None of the securities hold more than 3.4% share while information technology, financials, health care, consumer discretionary, and industrials are the top five sectors accounting for double-digit exposure each. The product has $174.8 billion in AUM and charges 9 bps in fees per year. It has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook (read: Fed Finally Hikes Rates: Quality ETFs & Stocks to Buy Now).

Since the stock market tends to rise on holiday optimism and year-end seasonal factors, high beta and high momentum ETFs are expected to lead the market in the weeks ahead. This is because high beta funds experience larger gains than the broader market counterparts in a soaring market. On the other hand, momentum investing should be a winning strategy for investors seeking higher returns in a short spell in any market environment. This strategy seeks to take advantage of market volatility by buying hot stocks, which have shown an uptrend over a few weeks or a few months, and selling those stocks that are going down.

So, a couple of high beta and momentum ETFs could be the best option to include in our Christmas tree. IIn particular, PowerShares S&P 500 High Beta Portfolio (SPHB – ETF report) and First Trust Dorsey Wright Focus 5 ETF (FV – ETF report) are the most popular choices in their respective areas. They went in to form the fronds and leaves of the tree (read: 3 High Momentum Stocks & ETFs for the Santa Rally).

SPHB tracks the performance of 100 stocks from the S&P 500 Index with the highest beta over the past 12 months. It has amassed $65.7 million in its asset base and charges 0.25% in expense ratio. The product is widely spread out across each security as none of them holds more than 1.54% of total assets. About one-fourth of the portfolio is allotted to energy, while financials, information technology and healthcare round off the next three spots with double-digit exposure each.

FV on the other hand tracks the Dorsey Wright Focus Five Index, which provides targeted exposure to the five First Trust sector and industry-based ETFs that Dorsey, Wright & Associates (DWA) believes have the maximum chance of outperforming the other ETFs in the selection universe. Securities with high relative strength scores (strong momentum) are given higher weights. Currently, the product has the highest exposure to the biotech sector via (FBT – ETF report) at 24.8%, followed by (FDN – ETF report) and (FXH – ETF report) at 21.0% and 19.3%, respectively. It has accumulated nearly $4.6 billion in AUM while it charges 94 bps in annual fees.  

For the top layers we’ve included financial ETFs like Financial Select Sector SPDR Fund (XLF – ETF report) as the sector is a major beneficiary of a rising interest rate environment. This is the most popular financial ETF with AUM of $19.1 billion and expense ratio of 0.14%. The fund follows the Financial Select Sector Index, holding 89 stocks in its basket. It is heavily concentrated in the top five firms that collectively make up 36.7% of the portfolio while the other firms hold less than 2.6% share (read: How These 4 ETFs Will Benefit from a Rate Hike).
 
At the very top is the star ETF of the year – First Trust Dow Jones Internet Index (FDN – ETF report). The fund offers exposure to the Internet corner of the broad technology space by tracking the Dow Jones Internet Composite Index. In total, it holds a small basket of 42 securities with double-digit allocation in the top two firms. The ETF has amassed $4.87 billion in AUM while charging 54 in fees.

Now that we are done with the tree’s structure, we are left with decorating it with lights and chocolates. For this, the best ETFs that could fit in here are iPath Pure Beta Cocoa ETN (CHOC – ETF report) for the chocolate decor, and most importantly Utilities Select Sector SPDR (XLU – ETF report) for lighting up the tree.