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5 Winning ETF Ideas for the Fourth Quarter

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The prospect of Fed tapering and inflationary fears have been acting as dampeners in the stock market in recent weeks. The Fed has indicated it will soon start rolling back on some of the monetary stimulus it provided during the pandemic crisis while inflation, which measures the increase in the cost of living over time, is running at 5.3% — the highest in nearly 13 years.

Concerns over accelerating coronavirus infections, signs of a slowdown in China, and the potential for high corporate tax rates are adding to the chaos.

However, the biggest vaccination drive, an expanded stimulus, a recovering economy and the resumption of corporate earnings growth have been driving the rally this year. The recovering job market, and reopening economies and businesses added to the strength. The combination of all the factors led to pent-up demand, resulting in a greater need for all types of products and services.

Given this, we have highlighted some investing ideas that could prove to be extremely beneficial for investors in the fourth quarter:

Make the Trending Energy Sector Your Friend

The energy sector has been the top performer this year buoyed by higher oil prices. U.S. oil price climbed to their highest since 2014 amid global supply concerns in crude, natural gas and coal markets. Added to the oil price strength is growing fuel demand. Overall demand for fuel has rebounded to pre-pandemic levels. With new vaccination mandates to control the rising Delta variant of COVID-19, demand is poised to increase. Additionally, the energy crunch has sent natural gas prices skyrocketing, prompting power producers to switch to oil derivatives from gas to generate electricity (read: 5 Best ETFs & Stocks of the Top Performing Energy Sector).

While most of the ETFs are beneficiaries of this trend, First Trust ISE-Revere Natural Gas Index Fund (FCG - Free Report) and Invesco Dynamic Energy Exploration & Production ETF PXE more than doubled this year. The solid trend is likely to continue given that these have a Zacks ETF Rank #2 (Buy) or 3 (Hold).

Bet on Rate-Friendly Sectors

A rising rate environment is highly beneficial for cyclical sectors like financials, industrials and consumer discretionary. Investors seeking protection against rising rates could load up stocks in these sectors through diversified ETFs or products targeting these sectors. Some of the broad ETFs having double-digit exposure to these four sectors are Vanguard Total Stock Market ETF (VTI - Free Report) , iShares Core S&P Total U.S. Stock Market ETF ITOT, Schwab U.S. Broad Market ETF SCHB, and iShares Russell 3000 ETF (IWV - Free Report) . Other sectors make up for a smaller part of the portfolio of these funds. All these funds have a Zacks ETF Rank #2 (read: ETF Strategies to Play Rising U.S. Treasury Yields).

Investors seeking a concentrated exposure to the particular sector could find top-ranked Financial Select Sector SPDR Fund (XLF - Free Report) , iShares U.S. Industrials ETF (IYJ - Free Report) and Invesco S&P SmallCap Consumer Discretionary ETF PSCD intriguing. All these funds have a Zacks ETF Rank #1 (Strong Buy) or 2, suggesting their outperformance in the coming months.

Add Value to Your Portfolio

Amid a myriad of woes, value investing seems appealing to investors. This is because value stocks, which have strong fundamentals — earnings, dividends, book value and cash flow — and trade below their intrinsic value, will likely benefit from growth in the economy and simultaneously from bouts of stock market volatility.

Value stocks seek to capitalize on the inefficiencies in the market and have the potential to deliver higher returns with lower volatility compared with the growth and blend counterparts. These are less susceptible to the trending markets and their dividend payouts offer safety in times of market turbulence. Given this, Vanguard Value ETF (VTV - Free Report) , iShares Russell 1000 Value ETF (IWD - Free Report) , Vanguard Mega Cap Value ETF MGV and Schwab U.S. Large-Cap Value ETF (SCHV - Free Report) having a Zacks ETF Rank #2 could be excellent picks.

Focus on Quality

Quality stocks are rich in value characteristics with healthy balance sheets, high return on capital, low volatility, elevated margins, and a track of stable or rising sales and earnings growth. These stocks thus reduce volatility when compared to plain vanilla funds and hold up rather well during market swings. Some of the funds in this category, MSCI USA Quality Factor ETF (QUAL - Free Report) , Invesco S&P 500 Quality ETF (SPHQ - Free Report) and Barrons 400 ETF BFOR are worth a look (read: Why You Should Invest in Quality Stocks & ETFs Now).

Emphasis on Dividends

Although dividend-focused stocks do not offer much price appreciation in a rising stock market, they offer a steady stream of income along with the potential of capital gains. These are the major sources of consistent income for investors to create wealth when returns from the equity market are at risk. The companies that pay out dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis.

As such, dividend-focused ETFs offer safety in the form of payouts and stability in the form of mature companies that are less volatile to large swings in stock prices. While there are several dividend ETFs, here are some of the top-ranked, high-yielding products — Vanguard High Dividend Yield ETF (VYM - Free Report) , iShares Core Dividend Growth ETF DGRO and SPDR Portfolio S&P 500 High Dividend ETF (SPYD - Free Report) . The trio has a Zacks ETF Rank #2 (read: Bet on Dividend ETFs to Ride Out Market Uncertainties).

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