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Top-Ranked Sector ETFs & Stocks to Buy for September
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After extending the rally from the best August in decades, Wall Street tumbled the most in almost three months on the Sep 3 trading session as investors dumped the high-flying tech stocks on concerns over lofty valuation. The rough trading will likely continue given that September is historically a weak month for the stock market.
Per the LPL Financial data, the S&P 500 has fallen about 1% on average in September since 1950. It also revealed that the index has shed 0.2% on average in the election year. This election year could be worse given that the COVID-19 pandemic continues to rage globally. Since World War II, the S&P 500 has seen an average decline of 0.5%, according to CFRA (read: Top-Ranked Mid-Cap ETFs Set to Defy September Curse).
The declines are due to a seasonal phenomenon as investors are more prone to selling than buying when they return from their summer vacations, trading volume after Labor Day is mostly bearish, many mutual funds have fiscal years ending Sep 30, window-dressing is rampant, and investors generally sell stocks to pay tuition bills for their kids’ private schools and colleges.
Though the historically weak month coupled with election uncertainty will continue to dent sentiments, the euphoria surrounding a COVID-19 vaccine, support from the Federal Reserve, and hopes of a new stimulus package could offer upside to the stocks. Additionally, encouraging data indicating that the American economy is gradually returning to the pre-pandemic level and that COVID-19 cases are moderating will add to the strength.
Against such a backdrop, investors could be well served by ETFs and stocks from sectors that house top-ranked industries.
Here’s How to Find the Top-Performing Sectors
While identifying the top-performing sector is a daunting task, the Zacks Industry Rank makes this process simpler. The Zacks Industry Rank is determined by calculating the average Zacks Rank for each stock in the industry and then assigning a rank to it. First, we selected the best industries that have a top Zacks Rank.
A top Zacks Industry Rank means that more stocks within that group are seeing upward earnings estimate revisions. Since an industry is a group of stocks in a similar business, this is the perfect way to size it up (read: all the Top Ranked ETFs).
The Zacks Industry classification divides the business world into 16 sectors, comprising 60 medium or M-level industries and 260 plus or X-level industries. We rank all 260 plus X-level industries based on the earnings outlook of the constituent companies into two groups: the top half (i.e., industries with the best average Zacks Rank) and the bottom half (the industries with the worst average Zacks Rank).
The top 132 Zacks Ranked industries would be in the top 50% of all X-level industries, whereas the bottom 133 Zacks Ranked industries would be in the bottom 50%.
Construction
The construction sector, especially the homebuilders, has emerged strongly from the COVID-19 pandemic. Almost all of the industries under this sector are top-ranked with homebuilders (top 1%) and wood (top 2%) leading the way higher, followed by paints and related products (top 2%), miscellaneous (top 8%), and heavy construction (top 12%). Tumbling mortgage rates and higher demand for new homes are driving homebuilders higher. This is because record-low mortgage rates are encouraging people to buy more homes and have made refinance cheaper. This trend is likely to continue at least this year on the Fed’s easy money policy (read: 6 Reasons Why Homebuilding ETFs Are a Strong Buy).
iShares U.S. Home Construction ETF (ITB - Free Report) : This fund provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index. With AUM of $2.3 billion, it holds a basket of 44 stocks with heavy concentration on the top two firms. Homebuilding and building products account for 65.2% and 14.4% share, respectively. The product charges 42 bps in annual fees and trades in heavy volume of around 3 million shares a day on average. It carries a Zack ETF Rank #3 (Hold) with a High risk outlook.
D.R. Horton Inc. (DHI - Free Report) : This Zacks Rank #1 is one of the leading national homebuilders, primarily engaged in the construction and sale of single-family houses both at the entry-level and in move-up markets. It saw positive earnings estimate revisions by 9 cents for the fiscal year (ending September 2020) in the past 30 days, and has an expected growth rate of 37.5%. The stock has a VGM Score of B.
Retail
This sector has been flourishing thanks to the digital shift, which has led to soaring e-commerce sales for retailers, including traditional brick and mortar. As such, automotive sales boast a top industry rank and are expected to outperform, followed by mail order (top 2%), automotive parts (top 9%) and home furnishings (top 9%).
Amplify Online Retail ETF (IBUY - Free Report) : This ETF offers global exposure to companies that derive 70% or more revenues from online and virtual retail by tracking the EQM Online Retail Index. The fund comprises 48 stocks in its basket and has attracted $973.4 million in its asset base. It charges 65 bps in fees per year and trades in average daily volume of 255,000 shares.
Wayfair Inc. (W - Free Report) : This Zacks Rank #2 company is one of the world's leading online sellers of home goods products, consisting of furniture and home decor. It saw positive earnings estimate revision to $1.52 from a loss of $3.73 for this year in a month, with an expected growth rate of 118.9%. The stock has a VGM Score of B.
Automotive
The automotive sector has gained momentum lately on improving economic conditions. The solid performance is likely to continue given that almost all industries belong to the top-ranked cohort with Internal Combustion Engines and Rubber – Tires leading the way with top 2% and top 13%, respectively.
First Trust NASDAQ Global Auto ETF (CARZ - Free Report) : This ETF offers a pure-play global exposure to 34 auto stocks by tracking the NASDAQ OMX Global Auto Index. It has a lower level of $29.6 million in AUM and charges 70 bps in fees per year. The product trades in average daily volume of 10,000 shares and has a Zacks ETF Rank #5 (Strong Sell) with a High risk outlook (read: 5 Sector ETFs That Beat the Market in August).
BRP Inc. (DOOO - Free Report) : This Zacks Rank #1 company designs, develops, manufactures and distributes recreational vehicles. The stock saw solid earnings estimate revision of $1.55 for fiscal year (ending January 2021) in the past 30 days and is expected to see earnings decline of 1.04%. The stock has a VGM Score of B.
Materials
The materials sector is seeing smooth trading lately as the economy is improving and metal prices are rising with a rebound in global demand. About 77% of the industries fall under the top-ranked category. Iron, gold, mining - non ferrous and mining -silver are placed in the top 31%.
Materials Select Sector SPDR (XLB - Free Report) : This is the most popular material ETF that follows the Materials Select Sector Index. It manages about $3.6 billion in its asset base and trades in volumes as heavy as around 5 million shares. In total, the fund holds about 28 securities in its basket with key holdings in chemicals, which dominates the portfolio with 70.3% share while containers & packaging, and metals & mining round off the top three positions. The product has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: 5 Cyclical Sector ETFs Hitting New Highs).
Rio Tinto PLC (RIO - Free Report) : This Zacks Rank #1 company is an international mining company having interests in mining for aluminum, borax, coal, copper, gold, iron ore, lead, silver, tin, uranium, zinc, titanium, dioxide feedstock, diamonds, talc and zircon. It saw solid earnings estimate revision of 73 cents for this year in the past one month and is expected to see growth of 6.79%. The stock has a VGM Score of A.
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Top-Ranked Sector ETFs & Stocks to Buy for September
After extending the rally from the best August in decades, Wall Street tumbled the most in almost three months on the Sep 3 trading session as investors dumped the high-flying tech stocks on concerns over lofty valuation. The rough trading will likely continue given that September is historically a weak month for the stock market.
Per the LPL Financial data, the S&P 500 has fallen about 1% on average in September since 1950. It also revealed that the index has shed 0.2% on average in the election year. This election year could be worse given that the COVID-19 pandemic continues to rage globally. Since World War II, the S&P 500 has seen an average decline of 0.5%, according to CFRA (read: Top-Ranked Mid-Cap ETFs Set to Defy September Curse).
The declines are due to a seasonal phenomenon as investors are more prone to selling than buying when they return from their summer vacations, trading volume after Labor Day is mostly bearish, many mutual funds have fiscal years ending Sep 30, window-dressing is rampant, and investors generally sell stocks to pay tuition bills for their kids’ private schools and colleges.
Though the historically weak month coupled with election uncertainty will continue to dent sentiments, the euphoria surrounding a COVID-19 vaccine, support from the Federal Reserve, and hopes of a new stimulus package could offer upside to the stocks. Additionally, encouraging data indicating that the American economy is gradually returning to the pre-pandemic level and that COVID-19 cases are moderating will add to the strength.
Against such a backdrop, investors could be well served by ETFs and stocks from sectors that house top-ranked industries.
Here’s How to Find the Top-Performing Sectors
While identifying the top-performing sector is a daunting task, the Zacks Industry Rank makes this process simpler. The Zacks Industry Rank is determined by calculating the average Zacks Rank for each stock in the industry and then assigning a rank to it. First, we selected the best industries that have a top Zacks Rank.
A top Zacks Industry Rank means that more stocks within that group are seeing upward earnings estimate revisions. Since an industry is a group of stocks in a similar business, this is the perfect way to size it up (read: all the Top Ranked ETFs).
The Zacks Industry classification divides the business world into 16 sectors, comprising 60 medium or M-level industries and 260 plus or X-level industries. We rank all 260 plus X-level industries based on the earnings outlook of the constituent companies into two groups: the top half (i.e., industries with the best average Zacks Rank) and the bottom half (the industries with the worst average Zacks Rank).
The top 132 Zacks Ranked industries would be in the top 50% of all X-level industries, whereas the bottom 133 Zacks Ranked industries would be in the bottom 50%.
Construction
The construction sector, especially the homebuilders, has emerged strongly from the COVID-19 pandemic. Almost all of the industries under this sector are top-ranked with homebuilders (top 1%) and wood (top 2%) leading the way higher, followed by paints and related products (top 2%), miscellaneous (top 8%), and heavy construction (top 12%). Tumbling mortgage rates and higher demand for new homes are driving homebuilders higher. This is because record-low mortgage rates are encouraging people to buy more homes and have made refinance cheaper. This trend is likely to continue at least this year on the Fed’s easy money policy (read: 6 Reasons Why Homebuilding ETFs Are a Strong Buy).
iShares U.S. Home Construction ETF (ITB - Free Report) : This fund provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index. With AUM of $2.3 billion, it holds a basket of 44 stocks with heavy concentration on the top two firms. Homebuilding and building products account for 65.2% and 14.4% share, respectively. The product charges 42 bps in annual fees and trades in heavy volume of around 3 million shares a day on average. It carries a Zack ETF Rank #3 (Hold) with a High risk outlook.
D.R. Horton Inc. (DHI - Free Report) : This Zacks Rank #1 is one of the leading national homebuilders, primarily engaged in the construction and sale of single-family houses both at the entry-level and in move-up markets. It saw positive earnings estimate revisions by 9 cents for the fiscal year (ending September 2020) in the past 30 days, and has an expected growth rate of 37.5%. The stock has a VGM Score of B.
Retail
This sector has been flourishing thanks to the digital shift, which has led to soaring e-commerce sales for retailers, including traditional brick and mortar. As such, automotive sales boast a top industry rank and are expected to outperform, followed by mail order (top 2%), automotive parts (top 9%) and home furnishings (top 9%).
Amplify Online Retail ETF (IBUY - Free Report) : This ETF offers global exposure to companies that derive 70% or more revenues from online and virtual retail by tracking the EQM Online Retail Index. The fund comprises 48 stocks in its basket and has attracted $973.4 million in its asset base. It charges 65 bps in fees per year and trades in average daily volume of 255,000 shares.
Wayfair Inc. (W - Free Report) : This Zacks Rank #2 company is one of the world's leading online sellers of home goods products, consisting of furniture and home decor. It saw positive earnings estimate revision to $1.52 from a loss of $3.73 for this year in a month, with an expected growth rate of 118.9%. The stock has a VGM Score of B.
Automotive
The automotive sector has gained momentum lately on improving economic conditions. The solid performance is likely to continue given that almost all industries belong to the top-ranked cohort with Internal Combustion Engines and Rubber – Tires leading the way with top 2% and top 13%, respectively.
First Trust NASDAQ Global Auto ETF (CARZ - Free Report) : This ETF offers a pure-play global exposure to 34 auto stocks by tracking the NASDAQ OMX Global Auto Index. It has a lower level of $29.6 million in AUM and charges 70 bps in fees per year. The product trades in average daily volume of 10,000 shares and has a Zacks ETF Rank #5 (Strong Sell) with a High risk outlook (read: 5 Sector ETFs That Beat the Market in August).
BRP Inc. (DOOO - Free Report) : This Zacks Rank #1 company designs, develops, manufactures and distributes recreational vehicles. The stock saw solid earnings estimate revision of $1.55 for fiscal year (ending January 2021) in the past 30 days and is expected to see earnings decline of 1.04%. The stock has a VGM Score of B.
Materials
The materials sector is seeing smooth trading lately as the economy is improving and metal prices are rising with a rebound in global demand. About 77% of the industries fall under the top-ranked category. Iron, gold, mining - non ferrous and mining -silver are placed in the top 31%.
Materials Select Sector SPDR (XLB - Free Report) : This is the most popular material ETF that follows the Materials Select Sector Index. It manages about $3.6 billion in its asset base and trades in volumes as heavy as around 5 million shares. In total, the fund holds about 28 securities in its basket with key holdings in chemicals, which dominates the portfolio with 70.3% share while containers & packaging, and metals & mining round off the top three positions. The product has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: 5 Cyclical Sector ETFs Hitting New Highs).
Rio Tinto PLC (RIO - Free Report) : This Zacks Rank #1 company is an international mining company having interests in mining for aluminum, borax, coal, copper, gold, iron ore, lead, silver, tin, uranium, zinc, titanium, dioxide feedstock, diamonds, talc and zircon. It saw solid earnings estimate revision of 73 cents for this year in the past one month and is expected to see growth of 6.79%. The stock has a VGM Score of A.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>