Talks of rising inflation in the United States have been rife since the passage of the $1.9-trillion stimulus bill that included the $1,400-stimulus check under the Biden administration. Widespread vaccination and a prolonged period of a dovish Fed have also fueled speculation.
Data points too are suggesting the same. The U.S. economy’s rebound from the pandemic is driving the biggest surge in inflation in nearly 13 years, with consumer prices rising in May by 5% from a year ago. “Day of reckoning’ is coming for high-flying tech stocks, Wells Fargo warned”, as quoted on CNBC. “The premium that you’re paying is still exceptionally high,” the firm’s head of equity strategy told CNBC’s “Trading Nation.”
Though benchmark treasury yields are still hovering at low levels, the strategist cautioned that a meaningful reversal is virtually inevitable, citing the fundamental economic backdrop. He expects such things to happen later this summer or early fall. The U.S. benchmark treasury yield started the year at 0.93% yield and it ended the first half of the year at 2.00%.
Against this backdrop, investors must be interested to know which sector ETFs should be picked at the current level, as the tech sector will likely fall prey to the rising rates if it is high-growth in nature.
Wells Fargo Securities’ Chris Harvey’s top cyclical picks now include large money center banks, chemical and aerospace companies. “Many of the cyclical companies still have mid-single-digit to double-digit upside from here on a relative and absolute basis,” Harvey said, as quoted on CNBC (read: Why Fear Rising Rates? Play Cyclical ETFs).
Notably, SPDR S&P 500 ETF Trust (SPY - Free Report) has a P/E of 22.08X. Most of the underlying sector ETFs have a P/E ratio less than SPY.
Sector ETFs to Play
Materials Select Sector SPDR ETF (XLB) – Zacks Rank #1 (Strong Buy): P/E 20.18X
Higher pent-up demand and an improving labor market should boost the inflationary pressure and increase the price of materials. The underlying Materials Select Sector Index seeks to provide an effective representation of the materials sector of the S&P 500 Index. The fund puts 68.11% in the chemical sector, followed by 14.1% in metals and mining, and 13% in container and packaging. It charges 12 bps in fees.
iShares U.S. Aerospace & Defense ETF (ITA) – Zacks Rank #2 (Buy): P/E 28.99X
The sector aerospace and defense should perform well amid gradual economic normalcy. Defense spending is a key part of every country’s budget and is likely to remain unperturbed by the economic situation.
The underlying Dow Jones U.S. Select Aerospace & Defense Index measures the performance of the aerospace and defense sector of the U.S. equity market. Though the P/E ratio of ITA is higher than SPY, investors should note that the defense sector holds potential and its year-to-date return is pretty decent at 16.7%.
U.S. Global Jets ETF (JETS) – Zacks Rank #2: P/E -13.29X
This is a purely cyclical play and is likely to outperform amid economic reopening. The sector is undervalued in status too as it suffered a lot in the peak of lockdown. The underlying U.S. Global Jets Index tracks the performance of Airline Companies across the globe with emphasis on domestic passenger airlines. The fund charges 60 bps in fees.
SPDR S&P Bank ETF (KBE) – Zacks Rank #2: P/E 20.18X
The banking sector outperforms in a rising rate environment. The underlying S&P Banks Select Industry Index is a modified equal-weighted index that seeks to reflect the performance of publicly traded companies that do business as banks or thrifts. The fund charges 35 bps in fees.
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Zacks Names "Single Best Pick to Double"
From thousands of stocks, 5 Zacks experts each have chosen their favorite to skyrocket +100% or more in months to come. From those 5, Director of Research Sheraz Mian hand-picks one to have the most explosive upside of all.
It’s a little-known chemical company that’s up 65% over last year, yet still dirt cheap. With unrelenting demand, soaring 2022 earnings estimates, and $1.5 billion for repurchasing shares, retail investors could jump in at any time.
This company could rival or surpass other recent Zacks’ Stocks Set to Double like Boston Beer Company which shot up +143.0% in little more than 9 months and NVIDIA which boomed +175.9% in one year.
Free: See Our Top Stock and 4 Runners Up >>
Talks of rising inflation in the United States have been rife since the passage of the $1.9-trillion stimulus bill that included the $1,400-stimulus check under the Biden administration. Widespread vaccination and a prolonged period of a dovish Fed have also fueled speculation.
Data points too are suggesting the same. The U.S. economy’s rebound from the pandemic is driving the biggest surge in inflation in nearly 13 years, with consumer prices rising in May by 5% from a year ago. “Day of reckoning’ is coming for high-flying tech stocks, Wells Fargo warned”, as quoted on CNBC. “The premium that you’re paying is still exceptionally high,” the firm’s head of equity strategy told CNBC’s “Trading Nation.”
Though benchmark treasury yields are still hovering at low levels, the strategist cautioned that a meaningful reversal is virtually inevitable, citing the fundamental economic backdrop. He expects such things to happen later this summer or early fall. The U.S. benchmark treasury yield started the year at 0.93% yield and it ended the first half of the year at 2.00%.
Against this backdrop, investors must be interested to know which sector ETFs should be picked at the current level, as the tech sector will likely fall prey to the rising rates if it is high-growth in nature.
Wells Fargo Securities’ Chris Harvey’s top cyclical picks now include large money center banks, chemical and aerospace companies. “Many of the cyclical companies still have mid-single-digit to double-digit upside from here on a relative and absolute basis,” Harvey said, as quoted on CNBC (read: Why Fear Rising Rates? Play Cyclical ETFs).
Notably, SPDR S&P 500 ETF Trust (SPY - Free Report) has a P/E of 22.08X. Most of the underlying sector ETFs have a P/E ratio less than SPY.
Sector ETFs to Play
Materials Select Sector SPDR ETF (XLB) – Zacks Rank #1 (Strong Buy): P/E 20.18X
Higher pent-up demand and an improving labor market should boost the inflationary pressure and increase the price of materials. The underlying Materials Select Sector Index seeks to provide an effective representation of the materials sector of the S&P 500 Index. The fund puts 68.11% in the chemical sector, followed by 14.1% in metals and mining, and 13% in container and packaging. It charges 12 bps in fees.
iShares U.S. Aerospace & Defense ETF (ITA) – Zacks Rank #2 (Buy): P/E 28.99X
The sector aerospace and defense should perform well amid gradual economic normalcy. Defense spending is a key part of every country’s budget and is likely to remain unperturbed by the economic situation.
The underlying Dow Jones U.S. Select Aerospace & Defense Index measures the performance of the aerospace and defense sector of the U.S. equity market. Though the P/E ratio of ITA is higher than SPY, investors should note that the defense sector holds potential and its year-to-date return is pretty decent at 16.7%.
U.S. Global Jets ETF (JETS) – Zacks Rank #2: P/E -13.29X
This is a purely cyclical play and is likely to outperform amid economic reopening. The sector is undervalued in status too as it suffered a lot in the peak of lockdown. The underlying U.S. Global Jets Index tracks the performance of Airline Companies across the globe with emphasis on domestic passenger airlines. The fund charges 60 bps in fees.
SPDR S&P Bank ETF (KBE) – Zacks Rank #2: P/E 20.18X
The banking sector outperforms in a rising rate environment. The underlying S&P Banks Select Industry Index is a modified equal-weighted index that seeks to reflect the performance of publicly traded companies that do business as banks or thrifts. The fund charges 35 bps in fees.
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>>
Zacks Names "Single Best Pick to Double"
From thousands of stocks, 5 Zacks experts each have chosen their favorite to skyrocket +100% or more in months to come. From those 5, Director of Research Sheraz Mian hand-picks one to have the most explosive upside of all.
It’s a little-known chemical company that’s up 65% over last year, yet still dirt cheap. With unrelenting demand, soaring 2022 earnings estimates, and $1.5 billion for repurchasing shares, retail investors could jump in at any time.
This company could rival or surpass other recent Zacks’ Stocks Set to Double like Boston Beer Company which shot up +143.0% in little more than 9 months and NVIDIA which boomed +175.9% in one year.
Free: See Our Top Stock and 4 Runners Up >>
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