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4 Sector ETFs to Watch for Gains in Q2

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Wall Street witnessed some volatility in the first quarter thanks to rising rate worries, uneven global economic recovery from the coronavirus-related slump and still-alive U.S.-China tension under the Biden administration. Still, positive factors are flowing in with vaccine optimism, a massive fiscal stimulus and hopes of a faster U.S. economic recovery.

Notably, the U.S. GDP contracted 3.5% in the pandemic-ridden 2020, marking its largest yearly decline since World War II and for the first time since the financial crisis of 2009. However, in its latest meeting, the Fed has raised its GDP forecast for 2021 to 6.5% from 4.2% guided in December. Per a recent Wall Street Journal article, 2021 may see the largest U.S. GDP growth since 7.9% in 1983 (read: Fed Bumps Up Economic Growth Forecasts: ETFs to Play).

Unemployment rate was guided down by the Fed to 4.5% from 5.0% for 2021, 3.9% from 4.2% for 2022 and 3.5% from 3.7% for 2023. The Fed’s PCE inflation expectation has gone up to 2.4% for 2021 from 1.8% projected in December, to 2.0% for 2022 (from 1.9%) and 2.1% for 2023 (from 2.0%). Median Federal funds rate projection for the long term was kept unchanged at 2.0%.

Meanwhile, projections for total earnings of the S&P 500 companies in 2021 have jumped 24.3% year over year on 8.7% higher revenues, per the Zacks Earnings Trends issued on Mar 17, 2021. Earnings estimates have risen persistently over the past few months. The Q2 earnings expectation for the S&P 500 companies is now a rise of 49.8% on 14.7% higher revenues.

The overall optimism has left many sectors with a massive upsurge in earnings estimates. Below, we highlight three lucrative sector ETFs that could be used to book some profits in this  market. Each offers an intriguing fundamental to protect investors’ portfolios in a rebounding economy:

First Trust Consumer Discretionary AlphaDEX Fund (FXD - Free Report)

A dovish Fed, fiscal stimulus under the Biden administration, $1400-stimulus checks, still-low oil prices, moderate inflation, ebbing health as well as financial risks with accelerated COVID-19 vaccination will make the case for discretionary investing quite apt now. There wasa 10% jump in personal consumption expenditure of Americans in January.

With the macroeconomic backdrop likely to recover more in Q2, consumer discretionary ETFs like FXD should thus log greater gains. Consumer Discretionary is one of the few sectors likely to log double-digit earnings growth in Q2. As of now, the sector is expected to see about 27.5% revenue gains in Q2 as per the Zacks Earnings Trend.  

iShares U.S. Basic Materials ETF (IYM - Free Report)

The sector is forecast to skyrocket as much as 148.4% as per the Zacks Earnings Trend in Q2, marking the second highest growth rate projected for the 16 sectors analyzed under the S&P 500 group. Revenues are expected to grow 27.5% in the second quarter. The sector is a beneficiary of low interest rates and higher economic activity. The Biden administration’s infrastructural expansion plan should also bode well for the sector.

SPDR S&P Bank ETF (KBE - Free Report)

With the Fed being dovish and economic improvements boosting long-term yields, the yield curve will steepen further. The biggest winner of the steepening yield curve is the financial sector. As banks seek to borrow money at short-term rates and lend at long-term rates, a steepening yield curve will earn more on lending and pay less on deposits, thereby leading to a wider spread. This expands net margins and increase banks’ profits.

Bargain hunting could also lead to some gains. As of now, the Zacks Earnings Trend predicts a 75.9% rise in Q2 earnings and 0.9% expansion in revenues from financial services companies (read: 4 Sectors & Their ETFs Offering Great Value Now).

Health Care Select Sector SPDR ETF (XLV - Free Report)

It is a safe bet as the broader healthcare sector is non-cyclical in nature. In the ongoing health emergency, no one can ignore the necessity of this sector, let alone the sector’s durability amid the growing need for medication and treatments for other critical diseases. At the current level, the Zacks Earnings Trend predicts a 15.9% rise in Q2 earnings and 14.6% expansion in revenues from medical companies.

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