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Cyclical ETFs to Gain on Vaccine Progress & Market Optimism

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The coronavirus pandemic that has so far infected more than 6 million in the United States caused an unprecedented collapse of economic activities, largely due to the shutdown of commerce and implementation of social-distancing measures.  However, investors seem to grow optimistic about business prospects as gradually, encouraging economic data is being released along with notable progress in the coronavirus vaccine development. In fact, last month marked the best August for the indices of Dow and the S&P 500 since 1984 and 1986, respectively.

Notably, reports of a spike in new coronavirus cases across the United States seem to subside a bit, which is buoying investors’ enthusiasm. Also, advancement in the vaccine development to combat the coronavirus pandemic seems impressive. Raising hopes higher, AstraZeneca plc (AZN) recently announced the beginning of a late-stage study in the United States on its coronavirus vaccine candidate AZD1222, which it is developing in partnership with the Oxford University. Moving ahead, Moderna (MRNA) is also developing a vaccine against COVID-19 in coordination with the National Institute of Allergy and Infectious Diseases, and Pfizer (PFE) in alliance with the German biotech firm BioNTech. Good news is that both already started their late-stage studies for the purpose.

Against this backdrop, bulls can ride the wave of favorable stocks in the cyclical sectors like industrial, financial, energy and consumer discretionary. Notably, stocks within the cyclical sectors mostly behave in tandem with the prevalent economic conditions and when growth returns to normal levels, these sectors automatically perform well.

Let’s look at how some popular ETFs belonging to these sectors are benefiting from the current scenario.

Consumer Discretionary ETFs

The reopening of the U.S. states definitely comes as a ray of hope for players in the consumer discretionary sector, which attracts a major portion of consumer spending. A number of restaurants and retailers started resuming business as restrictions are being relaxed in the United States. Also, the leisure and entertainment space should see a rebound as casinos and amusement parks started welcoming visitors.

Further, per the latest report on August U.S. consumer sentiment, the metric picked up late last month, largely on a bullish economic outlook amid the coronavirus outbreak. The University of Michigan’s consumer confidence index rose to 74.1 in August from 72.5 in July and 72.8 in the preliminary reading but was down from last August’s reading of 89.8, per a BloombergQuint article.

Therefore, to gain exposure to this space, investors can consider Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report) , Vanguard Consumer Discretionary ETF (VCR - Free Report) , Fidelity MSCI Consumer Discretionary Index ETF (FDIS) and First Trust Consumer Discretionary AlphaDEX Fund (FXD) (read: Hurricane Laura to Hurt/Boost These ETF Areas).

Bank ETFs

The banking industry suffered heavy blows from the coronavirus outbreak. However, the ramp-up in economic activities can offset this downside for the banking sector. Also, with support from the central bank and hopes of a further stimulus by the Congress, banks are expected to fare well in the near term.

Moreover, last week, the central bank announced a new strategy to revive the full-employment scenario to its pre-COVID levels in the United States and drive inflation back to a decent degree. Under the new scheme, the Fed will try and achieve inflation at 2%, on average, mitigating the below-2% phase with higher inflation "for some time". The change in the Fed’s tone suggests that its key overnight interest rate will remain at rock bottom in the medium term as the central bank is striving to drive inflation. The Fed’s announcement led to a steepening of the yield curve, which is the difference between yields on longer- and shorter-dated bonds. This condition is highly beneficial for the financial sector, especially the banks (read: Bank ETFs to Explode Higher on New Fed Policy).

To tap this opportunity, investors can opt for Invesco KBW Bank ETF (KBWB - Free Report) , SPDR S&P Regional Banking ETF (KRE - Free Report) , iShares U.S. Regional Banks ETF (IAT) and SPDR S&P Bank ETF (KBE) (read: Top ETF Stories of the Best August in 34 Years).

Industrial ETFs

The industrial sector, which took a hit from the disruption of global supply chains and the closedown of factories, is expected to rebound as the economy reopens. Moreover, the third quarter began with an improving trend in the US manufacturing activity in the United States. After clocking the highest reading since March 2019 in July 2020, the U.S. manufacturing activity accelerated to a nearly two-year high in August owing to solid new orders. Per the Institute for Supply Management (ISM) Sep 1 statement, the index of national factory activity rose to a reading of 56.0 last month from 54.2 in July. Economists polled by Reuters forecast that the index will rise to 54.5 in August.

In such a scenario, investors can take a look at The Industrial Select Sector SPDR Fund (XLI - Free Report) , Vanguard Industrials ETF (VIS - Free Report) , iShares U.S. Industrials ETF (IYJ) and Fidelity MSCI Industrials Index ETF (FIDU) (see all industrial ETFs here).

Energy ETFs

The energy sector bled profusely as the pandemic induced historically low oil price levels due to the dual blows of low demand and surplus supplies. However, as the economy is reopening, the demand level for oil started to pick up. Moreover, oil producers commenced lowering their production to record levels.

Significantly, China made a commitment to purchase more U.S. energy products like liquified natural gas, petroleum oil, methanol and coal under the terms of the U.S.-China Phase 1 trade deal. Going by a Reuters article, in the first half of this year, China bought 5% of the promised $25.3 billion worth energy products from the United States. Notably, reservations are made for tankers to carry at least 20 million barrels of U.S. crude in August and September by China state-owned oil firms, according to a Reuters report (see: all the Energy ETFs here).

Thus, investors can consider betting on Energy Select Sector SPDR (XLE - Free Report) , SPDR S&P Oil & Gas Equipment & Services ETF (XES), VanEck Vectors Oil Services ETF (OIH) and iShares U.S. Oil Equipment & Services ETF (IEZ - Free Report) .

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