Back to top

Image: Bigstock

ETF Strategies to Cheer the Market Momentum in October

Read MoreHide Full Article

Wall Street has had a volatile but impressive run so far in October. All the broader market indices are in the green territory for the month. The Dow Jones Industrial Average and the S&P 500 indices have gained 5% in the month. The tech-heavy Nasdaq Composite is also up 4.4%.

The upbeat third-quarter earnings season has instilled optimism among investors. Going by the Refinitiv data, out of the 117 S&P 500 companies that have reported the third-quarter earnings results so far, 84% have surpassed earnings estimates (per a CNBC article). Refinitiv estimates this earnings season to witness a profit growth rate of 35% for S&P 500 companies.

Commenting on the current earnings season, Anu Gaggar, global investment strategist at Commonwealth Financial Network,has said that “Rising tide of earnings is lifting all the boats and adding fuel to the bull market fire. The Q3 earnings season is off to a strong start despite concerns about supply bottlenecks and labor shortages.” This was mentioned in a CNBC article.

In an encouraging development, a lower-than-expected number of weekly jobless claims added to investors’ optimism. Initial unemployment insurance claims in the week ending Oct 15 came in at 290,000, as mentioned in a CNBC article. According to the same article, the metric lagged the 300,000 level as estimated by the economists, per a Dow Jones survey.

Investors and vaccine makers like Moderna (MRNA) andJohnson & Johnson (JNJ)have reasons to cheer the latest update concerning the application of COVID-19 booster shots. To combat the coronavirus outbreak and accelerate the distribution process of extra doses in the United States, the Centers for Disease Control and Prevention and its vaccine advisory committee and the FDA approved the vaccine booster shots produced by Johnson & Johnson and Moderna.

As mentioned in a CNBC article, the regulators have also permitted “mixing and matching” vaccines. This will enable Americans to opt for a booster shot from a different developer than those which came up with the initial doses.

ETF Strategies to Follow

Here we discuss certain ETF strategies to help investors gain from optimism surrounding the upbeat earnings season amid recovering U.S. economy from the pandemic-led slump:

Play the Momentum ETFs

While the broader stock market is expected to gain on optimism surrounding the rebounding U.S. economy and accelerated distribution of coronavirus vaccine, momentum investing will likely take centerstage as investors seek greater returns in the short term. Momentum investing looks to fetch profits from hot stocks that have shown an uptrend over the past few weeks or months. Investors can consider iShares MSCI USA Momentum Factor ETF (MTUM - Free Report) , Invesco DWA Momentum ETF (PDP - Free Report) , Invesco S&P MidCap Momentum ETF (XMMO - Free Report) , VictoryShares USAA MSCI USA Value Momentum ETF (ULVM) and SPDR Russell 1000 Momentum Focus ETF (ONEO) (read: Momentum ETFs Looking Attractive Amid Latest Market Optimism).

Growth ETFs to Ride the Optimism

The value trade has powered the stock bulls for most of this year. Investors have rotated back into growth-oriented market areas in recent weeks on optimism surrounding the economic recovery. In particular, big tech companies have rebounded strongly after being hit by inflation fears and lofty valuation concerns.

Given the bullishness, investors seeking to capitalize on the strong trends should consider growth ETFs. However, it is worth noting that these funds offer exposure to stocks with growth characteristics that have comparatively higher P/B, P/S and P/E ratios and exhibit a higher degree of volatility when compared to value stocks. Here, we highlight a few growth ETFs like Invesco Dynamic Large Cap Growth ETF (PWB - Free Report) , SPDR Portfolio S&P 500 Growth ETF (SPYG - Free Report) , iShares S&P 500 Growth ETF (IVW - Free Report) , Schwab U.S. Large-Cap Growth ETF (SCHG) and Vanguard S&P 500 Growth ETF (VOOG).

Try the ETFs to Gain From the Reopening Economy

The coronavirus vaccine rollout is gradually containing the spread of the outbreak across the globe. Accordingly, global demand and economic growth levels are on the mend from the pandemic-led slump. The optimism surrounding the gradual reopening of global economies and increasing demand is painting a rosy picture for the cyclical sectors.

Stocks within the cyclical sectors like industrial, financial, energy and consumer discretionary mostly move in tandem with the prevailing economic conditions, and when growth returns to normalcy, these sectors will automatically perform well.

Let’s look at how some popular ETFs belonging to the cyclical sector will benefit from the current scenario. These are, namely, The Industrial Select Sector SPDR Fund (XLI - Free Report) , Energy Select Sector SPDR (XLE - Free Report) , Fidelity MSCI Materials Index ETF (FMAT), Invesco KBW Bank ETF (KBWB) and Fidelity MSCI Consumer Discretionary Index ETF (FDIS) (read: Why Oil & Gas ETFs are Surging Again).

Small-Cap ETFs to Watch Out For

As indicated by the Russell 2000 Index, small-cap stocks have been performing impressively so far in 2021. This upside is being led mainly by small-cap companies closely tied to the U.S. economy and are thus well-positioned to outperform when the economy improves. The latest release of economic data is also indicating toward an improving economy. Therefore, investors can consider Schwab U.S. Small-Cap ETF (SCHA - Free Report) , SPDR S&P 600 Small Cap ETF (SLY - Free Report) , Vanguard S&P Small-Cap 600 ETF (VIOO) and John Hancock Multifactor Small Cap ETF (JHSC) (read: A Quick Guide to the 25 Cheapest ETFs).