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5 ETFs to Ride On the Rotation to Cyclical Sectors

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The stock market is witnessing volatility lately triggered by surging long-term yields and the resultant inflation threat. Notably, the 10-year yields surged to new one-year high of 1.42% while 30-year yields touched the highest since January 2020 of 2.28%.

Higher yields indicate investors’ optimism in the economy that has encouraged a flight to cyclical sectors like energy, financials, materials and industrials, rotating out of the high-growth sectors like technology. As the cyclical sectors are tied to economic activities, these outperform when economic growth improves.

With the continued progress in more COVID-19 vaccines, rapid vaccination rollout and the prospect of further U.S. stimulus, the economy is on the mend and is on a speedy recovery path. The combination of factors will lead to pent-up demand, resulting in higher demand for all types of products and services in the economy. In particular, Americans will spend on big-ticket items such as vacations and weddings, companies will go on hiring sprees, and the transition to new technologies such as electric vehicles will accelerate (read: Industrial ETFs to Gain as US Manufacturing Picks Up Amid Coronavirus).

Additionally, signs of a healing labor market and upbeat earnings with growing earnings estimates for the next quarters bode well for economic growth. Economists in a Wall Street Journal survey reveals that the U.S. economy will grow 4.3% this year, as the country exits the worst of the coronavirus pandemic. This marks a sharp increase from the 3.7% growth forecast for 2021 in last month’s survey. Goldman Sachs also raised its forecast for 2021 U.S. GDP growth to 6.8% from 6.6%.

Further, the stocks in the cyclical sectors are attractively valued at the current levels compared to the technology stocks, whose valuations rose to lofty levels.

As such, cyclical sectors are outperforming if we go by a one-week look. We have highlighted five ETFs from different cyclical sectors that led the way higher over the past week and have a Zacks ETF Rank #2 (Buy) or 3 (Hold).

U.S. Global Jets ETF (JETS - Free Report) – Up 10.9%

This fund provides exposure to the global airline industry, including airline operators and manufacturers from all over the world, by tracking the U.S. Global Jets Index. In total, the product holds 40 securities and charges investors 60 bps in annual fees. The fund has gathered $3.5 billion in its asset base while seeing solid trading volume of nearly 5.2 million shares a day. It has a Zacks ETF Rank #3 (Hold) (read: Airlines Earnings Mixed: ETF Appears a Contrarian Bet).

iShares U.S. Oil & Gas Exploration & Production ETF (IEO - Free Report) – Up 9.2%

This product offers exposure to U.S. companies that are engaged in the exploration, production, and distribution of oil and gas. It follows the Dow Jones U.S. Select Oil Exploration & Production Index, holding 38 stocks in its basket. The ETF has AUM of $218.4 million and trades in volume of 137,000 shares a day, on average. It charges 42 bps in annual fees and expenses and has a Zacks ETF Rank #3.

SPDR S&P Regional Banking ETF (KRE - Free Report) – Up 8.3%

This is one of the largest and most-popular ETFs in the banking space with AUM of $3.8 billion and an average daily volume of 7.5 million shares. The product follows the S&P Regional Banks Select Industry Index, charging investors 35 basis points a year in fees. Holding 128 securities in its basket, the fund is widely spread out across each security with an equal-weight approach of around 4%. The fund carries a Zacks ETF Rank #2 (Buy) (read: Yields Head for Big Monthly Gain: ETFs to Win & Lose).

Invesco Dynamic Leisure and Entertainment ETF (PEJ - Free Report) – Up 7.3%

This fund tracks the Dynamic Leisure and Entertainment Intellidex Index and holds a small basket of 31 stocks. From an industry look, hotels, restaurants and leisure takes the largest share at 40.9% while entertainment, media and food & staples retailing round off the next three spots with a double-digit exposure each. The ETF has amassed $1.3 billion in its asset base and trades in an average daily volume of 430,000 shares. PEJ charges 63 bps in annual fees and has a Zacks ETF Rank #3.

Invesco DWA Basic Materials Momentum ETF (PYZ - Free Report) – Up 5.8%

This ETF tracks the Dorsey Wright Basic Materials Technical Leaders Index, giving investors exposure to 31 stocks that are showing relative strength (momentum). Chemicals dominates the fund’s returns at 51% while metals & mining accounts for 32% of the portfolio. The fund has amassed $73.1 million in its asset base while charges 60 bps in fees and expenses. Volume is paltry as it exchanges nearly 15,000 shares in hand a day. The fund has a Zacks ETF Rank #2.

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