Wall Street has rallied hard this year on vaccine distribution, a prolonged period of easy money policy and fiscal stimulus. Stronger-than-expected earnings are the major catalysts at present. The Q2 earnings picture has been robust, with aggregate total quarterly earnings on track to reach a new all-time record. The strength has been palpable on the revenue side (read:
S&P 500 to Roar Higher: ETFs to Ride the Rally).
Data points too are suggesting the same. The U.S. economy added 943,000 jobs in July 2021,
the maximum in eleven months and above market expectations of 870,000. The job gains followed a similar increase in June (+938,000). The U.S. unemployment rate declined to 5.4% in July 202 , below market expectations of 5.7%.
The U.S. economy returned to the pre-pandemic level with GDP rising 6.5% annually in the second quarter. Consumer confidence rose to a 17-month high in July. The Senate’s move of introducing the bipartisan infrastructure bill of $550 billion on Aug 1 in addition to the previously-approved funds of $450 billion for five years has brought some optimism among investors. Total spending may go up to $1.2 trillion if the plan is extended to eight years (read:
ETFs to Win on Latest Infrastructure Bill Talks).
The U.S. benchmark treasury yield started the year at 0.93% yield and it stood at 1.31% on Aug 6, 2021. The fear of the spread of the Delta variant of COVID-19 kept the yield at low levels. 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.
Against this backdrop, below we highlight a few ETFs that are available at bargain and can go higher from here. These ETFs have a Zacks Rank #1 (Strong Buy) or #2 (Buy), P/E lower than that of
SPDR S&P 500 ETF Trust (SPY) (P/E of 22.2X) and higher one-month return from that of the S&P 500 (as of Aug 6, 2021). ETFs in Focus SPDR S&P Bank ETF ( KBE Quick Quote KBE - Free Report) : Zacks Rank #2; P/E: 10.61X; 1-Month Performance: 3.78%
The banking sector outperforms in a rising rate environment. If long-term rates rise on upbeat economic growth and short-term rates remain subdued on a dovish Fed, we will end up seeing a steepening in the yield curve. A steepening of the yield curve is good for banking stocks. And short-term rates will likely low for long as the Fed is likely to stay dovish on Delta concerns (read:
Fed Less Likely to Taper Soon on Delta Concerns: ETFs to Buy). Invesco S&P MidCap Value With Momentum ETF ( XMVM Quick Quote XMVM - Free Report) : Zacks Rank #2; P/E: 13.52X; 1-Month Performance: 3.12%
The underlying S&P 400 High Momentum Value Index is composed of securities with strong value characteristics selected from the Russell Midcap Index. The fund can be a beneficiary of the upbeat market sentiments.
Materials Select Sector SPDR ETF ( XLB Quick Quote XLB - Free Report) – Zacks Rank #1; P/E: 16.97X; 1-Month Performance: 3.05%
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. It charges 12 bps in fees.
Health Care Select Sector SPDR ETF ( XLV Quick Quote XLV - Free Report) – Zacks Rank #1; P/E: 17.60X; 1-Month Performance: 3.72%
Earnings expectations of the healthcare sector are upbeat for the second quarter of 2021. Higher demand for drugs, testing and vaccines for COVID-19 is a plus for the sector. The valuation of the sector is also compelling. The forward P/E of the large-cap pharma industry is 14.77X versus 21.00X of the S&P 500 (read:
Pharma & Healthcare ETFs at a One-Year High: Here's Why). Invesco Dividend Achievers ETF ( PFM Quick Quote PFM - Free Report) – Zacks Rank #2; P/E: 21.16X; 1-Month Performance: 2.57%
The underlying NASDAQ US Broad Dividend Achievers Index is designed to identify a diversified group of dividend-paying companies which have increased their annual dividend for 10 or more consecutive fiscal years. Investors should note that companies started raising dividends after the pandemic. Howard Silverblatt, senior index analyst from S&P Global Indices expects the overall dividend payout for the S&P 500 to increase 5% in 2021, per the CNBC article (read:
Dividend Growth ETFs Are Great Bets: Here's Why).