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Is It Again Time to Shift Focus to Cyclical ETFs?

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U.S. stocks were super steady in August as investors rotated into the beaten-down segments of the year — cyclicals. However, last week’s selloff cast doubts over the rally in stocks. Nine drug companies pledged that they will not submit vaccine candidates for FDA review until their safety and efficacy is shown in large clinical trials. AstraZeneca plc has stopped a late-stage trial of one of the leading COVID-19 vaccine candidates after an unexplained illness in a volunteer.

This raised concerns over a faster rollout of vaccine, leading to further uncertainty in the health emergency and economic recovery that in turn could weigh on the cyclical industries. Notably, cyclical industries are sensitive to the business cycle. These industries generate higher volume of revenues in periods of broader economic expansion and vice versa.

One Reason to Bet on Cyclical ETFs Once Again

Investors should note that cyclical sectors may see an upturn again asAstraZeneca has restarted British clinical trials of its COVID-19 vaccine, one of the most advanced in development, after receiving a nod from safety watchdogs, the company said on Sep 12.

Better-than-expected second-quarter earnings results and some upbeat economic indicators might also lead investors to shift their 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.

Also, the beginning of Q3 showed an improving trend in manufacturing activity in the United States. After clocking the highest reading since March 2019 in July, U.S. manufacturing activity accelerated to a nearly two-year high in August due to solid new orders (read: August U.S. Manufacturing Best in 2 Years: 5 Solid ETF Areas).

Against this backdrop, we can expect a renewed rally in cyclical ETFs or the laggards of the coronavirus pandemic. Below we highlight some of the options.

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 of higher defaults at the household and corporate levels hit the space hard. Banking stocks offer value now. Banking stocks are highly cyclicals as these are vulnerable to changes in economic conditions and policies.  

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

Airline stocks have bounced back strongly in the past month (as it gained 1.7% versus 0.2% uptick in the S&P 500) on a rebound in travel demand. Better consumer confidence and some federal aid have been aiding the airlines ETF (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.

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 started to gain investors’ attention now. The fund is considerably concentrated on Tesla. CARZ has added 5.4% past month.

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. 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 3.17% annually (read: Fed Targets "Average Inflation" of 2%: ETF Strategies to Play).

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