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Wall Street has been sizzling hot this holiday season, with the three major U.S. indices hitting all-time highs. Speculation that the Fed is done with interest rate hikes and a surge in tech stocks have been the major catalysts. The solid trend is likely to continue, given that the Santa Claus rally is on the way.

A Santa Claus rally refers to the increase in stock prices in the final week of the calendar year (i.e., between Christmas and New Year’s Day) that extends into the first two days of the new year. This looks more real this year, given that the Fed has boosted optimism in the stock market, indicating deeper rate cuts than expected for the next year.

The Fed, in its latest meeting, kept interest rates steady for the third time and penciled in three rate cuts of a total of 75 bps for the next year, compared with the previous forecast of two rate cuts in 2024.

Against such a backdrop, there are some hidden gems, or Secret Santa ETFs as we call them, which could surprise investors with big returns this Christmas. We have chosen five ETFs that have underperformed the market this year but have a Zacks ETF Rank #1 (Strong Buy) or #2 (Buy).

These include iShares U.S. Energy ETF (IYE - Free Report), WisdomTree U.S. High Dividend Fund (DHS - Free Report), iShares U.S. Pharmaceuticals ETF (IHE - Free Report), iShares U.S. Healthcare Providers ETF (IHF - Free Report), and SPDR S&P Dividend ETF (SDY - Free Report).

With inflation easing and the economy holding up better, the Fed has shifted to a dovish view. The central bank expects the federal funds rate to fall to a range of 4.4-4.9% in 2024, down from the current 5.25% to 5.50%. Markets have been pricing in a nearly 60% chance that the Fed will begin to cut rates at its March meeting, up from 40% the day prior, per the data from CME Group.

Americans are feeling more confident about the economy than they did over the past few months, as we head into Christmas. Consumer sentiment rebounded sharply in early December as worries about inflation receded. Retail sales also posted surprise growth in November after declining in the prior month. The data points to resilient consumers and a strong start to the holiday season, justifying that Santa is on the way.

We have highlighted the details of each Secret Santa ETF below.

iShares U.S. Energy ETF (IYE - Free Report) – Down 5.1%

This ETF tracks the Russell 1000 Energy RIC 22.5/45 Capped Gross Index (USD), giving investors exposure to U.S. companies that produce and distribute oil and gas. It holds 40 stocks in its basket, with a large concentration on the top two firms.

The ETF charges 40 bps in fees per year from its investors. It has AUM of $1.2 billion, and it sees an average daily volume of about 560,000 shares. The fund has a Zacks ETF Rank #2 (Buy) with a High risk outlook.

WisdomTree U.S. High Dividend Fund (DHS - Free Report) – Down 1.5%

This fund offers exposure to U.S. equity from high dividend-yielding companies by tracking the WisdomTree U.S. High Dividend Index. It holds 385 stocks in its basket, with key holdings in financials, energy, utilities, and consumer staples that account for double-digit exposure each.

The fund has amassed $1.1 billion in its asset base, and it trades in lower volumes of around 59,000 shares a day. It charges 38 bps in fees per year, and it has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

iShares U.S. Pharmaceuticals ETF (IHE - Free Report) – Down 0.9%

This ETF provides exposure to 34 U.S. companies that manufacture prescription or over-the-counter drugs or vaccines by tracking the Dow Jones U.S. Select Pharmaceuticals Index.

The ETF has $589 million in AUM, and it charges 40 bps in fees and expenses. Volume is light, as it exchanges about 18,000 shares a day. Additionally, the fund carries a Zacks ETF Rank #2 (Buy) with a High risk outlook.

iShares U.S. Healthcare Providers ETF (IHF - Free Report) - Down 0.4%

This ETF provides exposure to companies that offer health insurance, diagnostics, and specialized treatment. It follows the Dow Jones U.S. Select Healthcare Providers Index, and it holds 698 securities in its basket.

The ETF has amassed $928.7 million in its asset base, and it charges 40 bps in annual fees. Volume is good at about 17,000 shares per day, on average. The fund has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

SPDR S&P Dividend ETF (SDY - Free Report) – Up 1.6%

With AUM of $20.5 billion, this ETF provides well-diversified exposure to 121 U.S. stocks that have consistently increased their dividend for at least 20 consecutive years. This can be done by tracking the S&P High Yield Dividend Aristocrats Index. Industrials and consumer staples are the top two sectors, with 21% allocation each.

The ETF charges 35 bps in fees, and it trades in an average daily of 527,000 shares. It has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

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