Back to top

Image: Bigstock

ETF Sectors to Consider for Rotating Out of Tech in 2021

Read MoreHide Full Article

The technology sector has been the knight in shining armor for investors in the pandemic-stricken 2020. The resilience of major tech players has supported the more than 43% rise of Nasdaq composite so far in 2020. Meanwhile, the S&P 500 and Dow Jones Industrial Average have gained 15.6% and 6.5%, respectively, so far in 2020.

There are certain factors painting a bullish picture for the market going forward. President Trump has finally signed the new coronavirus relief and government funding package worth $900 billion into law. This includes $600 stimulus checks to Americans, $300 per week in augmented federal unemployment insurance for unemployed individuals, around $300 billion in aid for small businesses, including $284 billion in forgivable Paycheck Protection Program (per the sources), and tens of billions of dollars across other provisions like rental assistance, vaccine distribution funds, COVID-19 testing and contact tracing efforts and broadband support.

Going on, the airline payroll support is part of more than $45 billion of transportation relief funds (per a CNBC article). Moreover, the fiscal support funds will direct $82 billion to K-12 and higher education, according to the same CNBC article.

The beginning of the inoculation process among people is highly driving optimism. Notably, the two frontrunners in the COVID-19 vaccine race, namely, Moderna (MRNA) and Pfizer/BioNTech, have received the emergency use authorization from the FDA for their coronavirus vaccines.

Fed, with its intention to keep supporting economic recovery, has indicated that it will not hike rates until 2023. It is worth noting here that low rates will help ramp up economic activities and rebound from the coronavirus-induced slowdown. Additionally, easing worries regarding major policy changes are making the investing environment more conducive for market participants.

Against this backdrop, let’s look at the following ETF sectors that investors can keep an eye on in 2021:

Consumer Discretionary

The reopening of U.S. states came as a ray of hope for players in the consumer discretionary sector and gained investors’ attention. A number of restaurants and retailers started resuming business as restrictions were being relaxed in the United States. Notably, stocks within the cyclical sectors mostly behave in tandem with prevalent economic conditions and when growth returns to normal levels, these sectors automatically perform well.

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: Will ETFs Suffer as US Consumer Confidence Drops in December?).

Banking

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

Vaccine-driven economic recovery is expected to increase loan demands as people are likely to resume investments in business and other needs. Consequently, this is expected to boost net interest income for banks despite low interest rates, and support profitability to some extent. Going on, capital markets activities are picking up as can be seen from the increasing number of deals announced and rising IPOs. Advisory revenues are likely to be of major help to the banks fee income on this account.

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: 5 Sector ETFs Still At Cheap Prices Amid Peak Market).

Industrial

The industrial sector, which faced disruption in global supply chains and closedown of factories, is expected to rebound as the economy recovers from the coronavirus-led slump. The introduction of a coronavirus vaccine and addition of stimulus are expected to drive demand and economic activities in the sector.

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

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, oil producers started lowering their production to record levels.

Thanks to production cuts by major oil producers and signs of recovery in demand as some business lockdowns have been lifted globally, oil prices have been observed to rebound from their April-lows. The supply and demand balance is tightening. Meanwhile, OPEC+ members (including OPEC and non-OPEC allies) have decided to ramp up production by 500,000 barrels per day (Bbl/D) in January 2021, narrowing the total production cut from the current 7.7 million Bbl/D to 7.2 million Bbl/D. Riding the tide, Saudi Arabia has increased Asia’s oil pricing. Going on, OPEC+ member’s latest agreement to gradually raise production indicates oil producers’ expectation of sustained global recovery for fuel demand as encouraging progress is witnessed in coronavirus vaccine development.

Thus, investors can consider betting on Energy Select Sector SPDR (XLE - Free Report) , SPDR S&P Oil & Gas Equipment & Services ETF (XES - Free Report) , VanEck Vectors Oil Services ETF (OIH) and iShares U.S. Oil Equipment & Services ETF (IEZ) (read: 10 Most-Heavily Traded ETFs of Q4).

Want key ETF info delivered straight to your inbox?

Zacks' free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week.  Get it free >>