This summer, the U.S. stock markets seem to be on fire. This is especially true as the S&P 500 and the Dow Jones Industrial Average are hitting multiple highs amid geopolitical tensions. In fact, the Dow crossed its major milestone of 17,000 early this month and the S&P 500 is just less than 1% away from the 2,000 threshold.
In such a booming market, it is prudent to focus on cyclical sectors, which generally crush the overall market during bullish upswings and protect investors from the worst of the global turmoil. This is because the performance of cyclical stocks depends on economic growth and business activity (read: Best ETF Strategies to Consider Now).
Investors could smartly ride out the economic and market upturns through a number of sector ETFs with a diversified portfolio and relatively much lower risk than individual stocks. Some of the sectors are clearly the major beneficiaries of the summer trends. Though finding the hot summer sectors is not at all a difficult task, searching the right company in a particular industry for the portfolio might be a tall order for investors.
Keeping this in mind, we have narrowed down the list of ETFs by using the Zacks ETF Rank. This system looks to take into account a variety of factors, such as industry outlook and expert surveys, and then apply ETF-specific factors (like expense ratios and bid/ask spreads) in order to find the best funds in each segment.
Using this system, we have found a handful of ETFs in cyclical sectors that have a Zacks ETF Rank of 1 or ‘Strong Buy’, and are thus poised to outperform in the months to come. In fact, we have found two such funds that were promoted by at least two levels at the start of H2 (see: all the Top Ranked ETFs).
SPDR S&P Oil & Gas Exploration & Production ETF ((XOP - Free Report) )
This fund targets the energy sector and saw a strong bump from the Zacks ETF Rank 4 or ‘Sell’ rating thanks to geopolitics in Ukraine, Russia, Libya and the Middle East. The growing tensions in these countries are pushing up the energy prices thereby resulting in outperformance of the energy stocks. This trend is likely to continue in the second half.
Further, the oil/energy sector is expected to see robust earnings growth rising from 7.3% in the second quarter to 10.9% in the third and 13.5% in the fourth, as per the Zacks Earnings Trends. As such, XOP seems to be a solid choice in the energy space to play this surging trend. The fund follows the S&P Oil & Gas Exploration & Production Select Industry Index, holding 88 stocks in its portfolio.
The product provides equal weight exposure across a number of firms as each holds less than 1.5% of total assets. It has amassed nearly $1.1 billion in its asset base and trades in heavy volume of more than 3.7 million shares per day. The ETF charges 35 bps in annual fees from investors and has surged 16% so far this year (read: Market Beating Sector ETFs of 2014's First Half).
SPDR S&P Semiconductor ETF ((XSD - Free Report) )
This ETF is leading the broad tech world this year returning nearly 25%, as investors’ fled from the high growth Internet and social media stocks to value-centric traditional firms like semiconductors. This trend of migration will continue as the growth stocks remain expensive at the current levels. Further, encouraging industry fundamentals and growing semiconductor sales across the globe are fueling growth into the sector.
As a result, XSD has achieved the top level, up from #3 in our Rank hierarchy. XSD tracks the S&P Semiconductor Select Industry Index and holds 51 stocks in its portfolio. The product provides huge diversification benefits across each security as none of these allocates more than 2.6% of the assets (read: Top Performing US Sector ETF in Focus: XSD).
However, the fund is less popular and illiquid with AUM of $181 million and has an average daily volume of around 85,000 shares. Expense ratio is the lowest at 35 bps when compared to other semiconductor products in the space.
These two cyclical sector ETFs have been the leaders in the broad market rally this year and have accounted for huge gains so far amid the global turmoil. Given that the bullish trend for these sectors will likely persist for the rest of summer, investors should definitely look to these ETFs or the other cyclical sector funds that have recently seen their Ranks surging to the #1 level.
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