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Don't Fear Correction: ETF Laggards Are Emerging Leaders

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U.S. stocks were super steady in August as investors rotated into the beaten-down segments of the year — cyclicals. The Nasdaq 100 rose nearly 11% in August compared to a gain of about 7% for the S&P 500, 6.6% advancement in the Dow Jones and 5.5% rise for the Russell 2000. The S&P 500, in fact, enjoyed the best August in 34 years.

Better-than-expected second-quarter earnings results, and positive updates on vaccine and treatment for the virus led investors to shift focus to reopening trade. Recent data points show that the outbreak is gradually coming under control, even in the hardest-hit states. Economic datapoints are coming in decent, if not great.

However, things took a radical turn on Sep 3 after the S&P 500 posted its worst single-session drop in nearly three months. Some subdued economic datapoints and a monstrous rally in the high-profile tech names (that caused overvaluation concerns) caused the correction on Sep 3.

The S&P 500, the Dow Jones, the Nasdaq and the Russell 2000 were off 3.5%, 2.8%, 5% and 3%, respectively, on Sep 3. However, we don’t see the selloff as a signal of rising market fear. In fact, the selling trend indicates that winners are emerging as the key losers now and vice versa.

Selloffs were the worst in tech stocks. Amazon (down 4.6% on Sep 3), Apple (Down 8%), Microsoft (down 6.2%), Tesla (down 9%), Zoom (down about 10%) – strongest performers in past months – were hurt heavily.

Against this backdrop, below we highlight a few ETF areas where money could be parked in for safety as these are emerging as the new leaders.

ETFs in Focus

SPDR S&P Bank ETF (KBE - Free Report)

Banking stocks have been extremely beaten down in the past few months as fears for higher defaults at the household and corporate levels hit the space hard. The fund KBE lost 20.3% in the past six months but gained 0.03% on Sep 3 (despite a decline in long-term bond yields). Banking stocks offer value now.

Vanguard S&P 500 Value Index Fund ETF Shares (VOOV - Free Report)

The S&P 500 Value Index measures the performance of large capitalization value stocks. Value stocks are safer bets in an edgy environment. Moreover, the segment has so far been a laggard and thus has more compelling valuations than growth stocks. The fund charges 10 bps in fees and yields 2.49% annually. It lost just 1.8% versus 4.4% losses in growth ETF Vanguard S&P 500 Growth Index Fund ETF Shares (VOOG) (read: Fed Targets "Average Inflation" of 2%: ETF Strategies to Play).

U.S. Global Jets ETF (JETS - Free Report)

Airline stocks bounced back strongly past month (as it jumped 16.6%) on a rebound in travel demand.  This is especially true as the number of people going through airport security screening checkpoints hit a five-month high in mid-August. Better consumer confidence and some federal aid have been aiding the airlines ETF. Selloffs on Sep 3 could not hurt the space much as JETS (one of the main victims of the coronavirus crisis) was down only 0.2% on the day (read: Airline ETF Takes Off: Will The Surge Continue?).

Industrial Select Sector SPDR ETF (XLI - Free Report)

The sector has suffered massively amid the pandemic. With millions of Americans still unemployed, creation of blue-collar jobs would be of high priority. The latest recruitment pattern in the sector also calls for optimism (read: August U.S. Manufacturing Best in 2 Years: 5 Solid ETF Areas).

Moreover, the Institute for Supply Management (ISM) said on Sep 1 that its index of national factory activity rose to a reading of 56.0 last month from 54.2 in July. That marked the highest level since November 2018 and three successive months of growth. The fund XLI lost only 2.8% on Sep 3, way better performance than the high-growth tech ETFs.

First Trust NASDAQ Global Auto Index Fund (CARZ - Free Report)

This is yet another beaten-down area amid the virus crisis. Global auto sales were hugely hurt. However, the fund has begun to gain investors’ attention now. CARZ lost only 1.9% on Sep 3. The fund puts considerable weight in Tesla. If we omit Tesla’s steep losses on Sep 3, the fund’s performance would be even better. 

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