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Time to Rotate to Cyclical Sector ETFs?

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U.S. stocks have been super steady this week on Pfizer’s latest announcement that its vaccine candidate was found 90% effective in preventing COVID-19 in participants. This raised hopes of a return to normalcy sooner than expected. Moreover, chances of a divided Congress in the United States, which means status quo and the likelihood of no major policy changes in the medium term, aided the equity rally.

The dual tailwinds led investors to rotate into the beaten-down segments of the year — cyclicals. 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 (read: Leveraged ETF Areas That Gained the Most on Vaccine Hopes).

Vaccine Hope to Drive Cyclical Stocks

Rollout of vaccines alongwith a dovish Fed means an uptick in economic activities and return to normalcy in the medium term. Better-than-expected third-quarter earnings results and some decent economic indicators like manufacturing activities, jobs data and home sales for previous months (despite the COVID-19 surge) might also lead investors to shift their focus to economic recovery.

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.

Industrial Select Sector SPDR ETF (XLI - Free Report)

The sector has suffered massively amid the pandemic. With millions of Americans still unemployed, the creation of blue-collar jobs would be of high priority. The latest recruitment pattern in the sector also calls for optimism.

In October, there were faster increases in new orders, new export orders, production, and an uptick in employment and inventories. The new orders sub-index reading of 67.9 marked the highest reading since January 2004. Manufacturing employment grew for the first time since July 2019 (read: October US Manufacturing About 2-Year Best: 4 Solid ETF Areas).

Energy Select Sector SPDR Fund (XLE - Free Report)

The coronavirus-led global slowdown weighed on oil demand. The second wave of the virus attack could put many countries under lockdown. Citi recently slashed its 2021 Brent and West Texas Intermediate crude price outlook by $5 to $54 and $49, respectively. But vaccine hopes lessen that fear to a large extent and can boost the energy sector.

SPDR S&P Bank ETF (KBE - Free Report)

Banking stocks have been extremely beaten down over 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 cyclical as these are vulnerable to changes in economic conditions and policies.  

iShares Transportation Average ETF (IYT - Free Report)

A rebound in travel and transportation demand should also be in the cards on vaccine hopes. Better consumer confidence and some federal aid (which is likely next year, though not sure) should propel the space.

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. Notably, new-car sales in Europe increased last month for the first time this year.

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