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Cyclical Sector Outperforming: 6 Cheap ETFs to Track

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Vaccine optimism has brought back the lure for the cyclical sector ETFs. This is especially true as a vaccine is being viewed as “a beginning to the end” of the pandemic that should lead to a swift recovery in economic growth, leading to higher spending and confidence.

The potential for a divided Congress has also been fueling the stock market. Democratic candidate Joe Biden is likely to gain the control of the White House having become the president-elect of the United States while Republicans may keep the Senate. The combination will lead to favorable economic policies with reduced chances of major tax increases and tighter regulations. In fact, the prospects for a smooth transition of Biden to White House has been improving, thereby bolstering further confidence in the market. Further, trillions of dollars injected into the economy are driving the rally (read: ETF Sectors to Bet on Positive Vaccine News).

As the cyclical sectors are tied to economic activities, these outperform when economic growth improves. If history is any guide, cyclical sector tends to benefit the most during the stock market surge in the the six-month period from November to April buoyed by seasonal trends. Further, the stocks in these sectors are attractively valued at the current levels as they were beaten down badly by the coronavirus-led market sell-off.

As such, investors should take advantage of the beaten down prices amid bullish market trends for the cyclical sectors. Below, we have presented six ETFs that are currently undervalued and could generate solid returns in a rising stock market. These funds have a Zacks Rank #3 (Hold) and a lower P/E ratio than 24.03 for the broad market fund (SPY - Free Report) .

First Trust Nasdaq Oil & Gas ETF (FTXN - Free Report) – P/E Ratio: 5.79

This fund follows the Nasdaq US Smart Oil & Gas Index, which measures the performance of the most liquid oil and gas securities from the NASDAQ US Benchmark Index screened through volatility, value and growth. It is a basket of 47 stocks and has amassed $18.2 million in its asset base. The product trades in an average daily volume of around 20,000 shares and charges 60 bps in annual fees.

Invesco S&P 500 Equal Weight Financials ETF (RYF - Free Report) – P/E Ratio: 11.32

This ETF targets the S&P 500 Equal Weight Financials Index, which weighs stocks in the financial sector of the S&P 500 Index. It holds 65 stocks in its basket with key holdings in insurance, capital markets, and banking sector. The fund has amassed $167.8 million in its asset base and trades in an average daily volume of 21,000.

First Trust NASDAQ Global Auto ETF (CARZ - Free Report) – P/E Ratio: 11.72

This fund offers a pure-play global exposure to 34 auto stocks by tracking the NASDAQ OMX Global Auto Index. It has a lower level of $40.4 million in AUM and trades in a small average daily trading volume of about 12,000 shares. The product charges 70 bps in fees per year (read: 5 Must-Watch ETF Charts After Q3 Earnings).

First Trust Materials AlphaDEX Fund (FXZ - Free Report) – P/E Ratio: 15.23

This product targets the broad materials sector and follows the StrataQuant Materials Index. It holds 38 stocks in its basket with commodity chemicals taking the largest share at 32.6% of the portfolio while steel, specialty chemicals and agricultural chemicals round off the next spots. The fund has accumulated $157.1 million in its asset base and trades in volumes of 37,000 shares a day on average. It charges 65 bps in annual fees.

iShares U.S. Aerospace & Defense ETF (ITA - Free Report) – P/E Ratio: 15.47

This fund provides investors exposure to U.S. companies that manufacture commercial and military aircraft and other defense equipment by tracking the Dow Jones U.S. Select Aerospace & Defense Index. It holds 35 stocks with AUM of $3 billion and expense ratio of 0.42%. Volume is good at around 183,000 shares.

iShares Dow Jones Transportation Average Fund (IYT - Free Report) – P/E Ratio: 18.11

The fund provides exposure to U.S. airline, railroad, and trucking companies and tracks the Dow Jones Transportation Average Index. It holds a small basket of 20 securities and charges 42 bps in annual fees. The fund has $1.4 billion in AUM and sees a solid trading volume of around 251,000 shares a day (read: Why Cyclical Sector ETFs Are Roaring to All-Time Highs).

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