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Sector ETFs Set to Soar Post Strong January Job Data
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The job markets are showing signs of acceleration in a roaring economy. This is especially true given that Americans saw huge gains in pay last month amid better-than-expected hiring, indicating a solid start to 2018 for the job market.
The economy added 200,000 jobs in January, edging past analysts’ expectation of 180,000 while the unemployment rate held steady at 4.1% — its lowest level since December 2000. Job gains were broad-based, with a 47% surge in hiring toward education and health services, 38% in professional and business services, 31% in leisure and hospitality and 11% in construction.
With this, the economy has added jobs for 88 consecutive months, the longest streak on record, indicating that the job market has come a long way from the Great Recession, which ended in 2009 (read: Sector ETF & Stock Winners 10-Years Since Great Recession).
Wage growth has been the bright spot in the latest job report. Average hourly wages rose 0.3%, pushing the year over year increase to 2.9%, marking the fastest pace in more than eight years. This has sparked a wave of inflation and thereby speculation of tightening monetary policy aggressively. The Fed has forecast three rate hikes for this year but faster inflation could force the Fed to raise rates more frequently.
As a result, investors should bet on ETFs that are the largest beneficiaries of job gains. Below, we have highlighted some of these that will likely see smooth trading in the days ahead.
A rising rate scenario is highly profitable for the banks as these seek to borrow money at short-term rates and lend at long-term rates thereby resulting in expanding net margins and bolstering banks’ profits. KRE targets the banking corner of the financial sector and follows the S&P Regional Banks Select Industry Index. It holds 117 stocks in its basket with none holding more than 2.55% of assets. KRE is one of the largest and the most popular ETFs in the banking space with AUM of $4.7 billion and average daily volume of around 6.3 million shares. It charges 35 bps a year in fees and has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: 8 Power-Packed ETFs for 2018).
Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report)
Increased wages will pump up consumers’ power to spend more on luxury items. While most of the consumer discretionary ETFs will benefit from this trend, the ultra-popular XLY having AUM of $13.1 billion and average daily volume of 4.4 million shares could be a compelling choice. It tracks the Consumer Discretionary Select Sector Index and holds 84 securities with higher concentration on the top firm at 19.2%. Other firms make up for a nice mix with each holding less than 7.6% of assets. The fund charges 13 bps in fees per year and has a Zacks ETF Rank #3 with a Medium risk outlook (read: Amazon ETFs to Buy on Q4 Blockbuster Results).
A higher number of hiring in healthcare service sector makes XHS an attractive pick. The fund uses an equal weight methodology to each security by tracking the S&P Health Care Services Select Industry Index. Holding 49 stocks in its basket, each security accounts for no more than 3.13% of total assets. The fund has amassed $95.7 million in its asset base and trades in a paltry volume of around 6,000 shares a day. Expense ratio comes in at 0.35%. The ETF has a Zacks ETF Rank #3 with a Medium risk outlook (read: 4 Sector ETFs & Stocks Set to Explode Higher on Tax Cuts).
PowerShares Dynamic Leisure and Entertainment Fund (PEJ - Free Report)
Leisure and hospitality also saw a solid increase in hiring. As a result, PEJ is also a good addition to the portfolio. This fund tracks the Dynamic Leisure and Entertainment Intellidex Index and holds a small basket of 30 stocks. It is pretty well spread out across various securities as none accounts for more than 5.23% of total assets. From an industry look, hotels & leisure facilities, and casinos & gaming take the largest share at 29% and 27%, respectively, while movies & entertainment and airlines round off the next two spots with 13% exposure each. The ETF has amassed $107.2 million in its asset base and trades in light volume of 15,000 shares a day on average. PEJ charges 621 bps in annual fees and has a Zacks ETF Rank #2 (Buy) with a High risk outlook.
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Sector ETFs Set to Soar Post Strong January Job Data
The job markets are showing signs of acceleration in a roaring economy. This is especially true given that Americans saw huge gains in pay last month amid better-than-expected hiring, indicating a solid start to 2018 for the job market.
The economy added 200,000 jobs in January, edging past analysts’ expectation of 180,000 while the unemployment rate held steady at 4.1% — its lowest level since December 2000. Job gains were broad-based, with a 47% surge in hiring toward education and health services, 38% in professional and business services, 31% in leisure and hospitality and 11% in construction.
With this, the economy has added jobs for 88 consecutive months, the longest streak on record, indicating that the job market has come a long way from the Great Recession, which ended in 2009 (read: Sector ETF & Stock Winners 10-Years Since Great Recession).
Wage growth has been the bright spot in the latest job report. Average hourly wages rose 0.3%, pushing the year over year increase to 2.9%, marking the fastest pace in more than eight years. This has sparked a wave of inflation and thereby speculation of tightening monetary policy aggressively. The Fed has forecast three rate hikes for this year but faster inflation could force the Fed to raise rates more frequently.
As a result, investors should bet on ETFs that are the largest beneficiaries of job gains. Below, we have highlighted some of these that will likely see smooth trading in the days ahead.
ETFs to Consider
SPDR S&P Regional Banking ETF (KRE - Free Report)
A rising rate scenario is highly profitable for the banks as these seek to borrow money at short-term rates and lend at long-term rates thereby resulting in expanding net margins and bolstering banks’ profits. KRE targets the banking corner of the financial sector and follows the S&P Regional Banks Select Industry Index. It holds 117 stocks in its basket with none holding more than 2.55% of assets. KRE is one of the largest and the most popular ETFs in the banking space with AUM of $4.7 billion and average daily volume of around 6.3 million shares. It charges 35 bps a year in fees and has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: 8 Power-Packed ETFs for 2018).
Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report)
Increased wages will pump up consumers’ power to spend more on luxury items. While most of the consumer discretionary ETFs will benefit from this trend, the ultra-popular XLY having AUM of $13.1 billion and average daily volume of 4.4 million shares could be a compelling choice. It tracks the Consumer Discretionary Select Sector Index and holds 84 securities with higher concentration on the top firm at 19.2%. Other firms make up for a nice mix with each holding less than 7.6% of assets. The fund charges 13 bps in fees per year and has a Zacks ETF Rank #3 with a Medium risk outlook (read: Amazon ETFs to Buy on Q4 Blockbuster Results).
SPDR S&P Health Care Services ETF (XHS - Free Report)
A higher number of hiring in healthcare service sector makes XHS an attractive pick. The fund uses an equal weight methodology to each security by tracking the S&P Health Care Services Select Industry Index. Holding 49 stocks in its basket, each security accounts for no more than 3.13% of total assets. The fund has amassed $95.7 million in its asset base and trades in a paltry volume of around 6,000 shares a day. Expense ratio comes in at 0.35%. The ETF has a Zacks ETF Rank #3 with a Medium risk outlook (read: 4 Sector ETFs & Stocks Set to Explode Higher on Tax Cuts).
PowerShares Dynamic Leisure and Entertainment Fund (PEJ - Free Report)
Leisure and hospitality also saw a solid increase in hiring. As a result, PEJ is also a good addition to the portfolio. This fund tracks the Dynamic Leisure and Entertainment Intellidex Index and holds a small basket of 30 stocks. It is pretty well spread out across various securities as none accounts for more than 5.23% of total assets. From an industry look, hotels & leisure facilities, and casinos & gaming take the largest share at 29% and 27%, respectively, while movies & entertainment and airlines round off the next two spots with 13% exposure each. The ETF has amassed $107.2 million in its asset base and trades in light volume of 15,000 shares a day on average. PEJ charges 621 bps in annual fees and has a Zacks ETF Rank #2 (Buy) with a High risk outlook.
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Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>