Talks of rising inflation in the United States have been rife since the passage of the $1.9-trillion stimulus bill that included the $1,400-stimulus check under the Biden administration. Widespread vaccination and a prolonged period of a dovish Fed have also fueled speculation.

Data points too are suggesting the same. The U.S. economy’s rebound from the pandemic is driving the biggest surge in inflation in nearly 13 years, with consumer prices rising in May by 5% from a year ago. “Day of reckoning’ is coming for high-flying tech stocks, Wells Fargo warned”, as quoted on CNBC. “The premium that you’re paying is still exceptionally high,” the firm’s head of equity strategy told CNBC’s “Trading Nation.”

Though benchmark treasury yields are still hovering at low levels, the strategist cautioned that a meaningful reversal is virtually inevitable, citing the fundamental economic backdrop. He expects such things to happen later this summer or early fall. The U.S. benchmark treasury yield started the year at 0.93% yield and it ended the first half of the year at 2.00%.

Against this backdrop, investors must be interested to know which sector ETFs should be picked at the current level, as the tech sector will likely fall prey to the rising rates if it is high-growth in nature.

Wells Fargo Securities’ Chris Harvey’s top cyclical picks now include large money center banks, chemical and aerospace companies. “Many of the cyclical companies still have mid-single-digit to double-digit upside from here on a relative and absolute basis,” Harvey said, as quoted on CNBC  (read: Why Fear Rising Rates? Play Cyclical ETFs).

Notably, SPDR S&P 500 ETF Trust (SPY Quick QuoteSPY - Free Report) has a P/E of 22.08X. Most of the underlying sector ETFs have a P/E ratio less than SPY.

Sector ETFs to Play

Materials Select Sector SPDR ETF ((XLB Quick QuoteXLB - Free Report) ) – Zacks Rank #1 (Strong Buy): P/E 20.18X

Higher pent-up demand and an improving labor market should boost the inflationary pressure and increase the price of materials. The underlying Materials Select Sector Index seeks to provide an effective representation of the materials sector of the S&P 500 Index. The fund puts 68.11% in the chemical sector, followed by 14.1% in metals and mining, and 13% in container and packaging. It charges 12 bps in fees.

iShares U.S. Aerospace & Defense ETF ((ITA Quick QuoteITA - Free Report) ) – Zacks Rank #2 (Buy): P/E 28.99X

The sector aerospace and defense should perform well amid gradual economic normalcy. Defense spending is a key part of every country’s budget and is likely to remain unperturbed by the economic situation.

The underlying Dow Jones U.S. Select Aerospace & Defense Index measures the performance of the aerospace and defense sector of the U.S. equity market. Though the P/E ratio of ITA is higher than SPY, investors should note that the defense sector holds potential and its year-to-date return is pretty decent at 16.7%.

U.S. Global Jets ETF ((JETS Quick QuoteJETS - Free Report) ) – Zacks Rank #2: P/E -13.29X

This is a purely cyclical play and is likely to outperform amid economic reopening. The sector is undervalued in status too as it suffered a lot in the peak of lockdown. The underlying U.S. Global Jets Index tracks the performance of Airline Companies across the globe with emphasis on domestic passenger airlines. The fund charges 60 bps in fees.

SPDR S&P Bank ETF ((KBE Quick QuoteKBE - Free Report) ) – Zacks Rank #2: P/E 20.18X

The banking sector outperforms in a rising rate environment. The underlying S&P Banks Select Industry Index is a modified equal-weighted index that seeks to reflect the performance of publicly traded companies that do business as banks or thrifts. The fund charges 35 bps in fees.

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