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ETF Strategies to Ride the Market Optimism in November

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Investors seem to be enjoying the impressive Wall Street rally triggered by a strong third-quarter earnings season, an encouraging jobs report and the Federal Reserve’s moves that were on-par with expectations. The three major U.S. stock exchanges closed at record highs on Nov 5 to finish off a strong week. The Dow Jones Industrial Average increased about 0.6%, witnessing its sixth-straight position trading session. The S&P 500 also jumped 0.4% for its seventh consecutive positive session. The Nasdaq Composite also rose 0.2% to witness its tenth straight winning session.

The impressive third-quarter earnings results have been keeping investors busy. The earnings results have also eased investors' worries surrounding the rising supply-chain disturbances eroding corporate profit margins. The upside in the market has also been driven by the much-anticipated announcements from the Federal Reserve. The central bank has informed about its plan to initiate the tapering of bond purchases “later this month” (as stated in a CNBC article).

In another positive development, the U.S. jobs report for November seemed very impressive. The nonfarm payrolls rose by 531,000 in October, surpassing the estimate of 450,000, per a CNBC article. Also, beating expectations, the unemployment rate declined to 4.6%, hitting a new pandemic low level (according to a CNBC article).

In this regard, JPMorgan’s David Lebovitz has commented that “The economy is certainly picking up some momentum. We are expecting economic growth to accelerate here into the end of 2021 and the beginning of 2022,” as mentioned in a CNBC article.

Wall Street has another reason to cheer as the U.S. House of Representatives has passed the more than $1-trillion infrastructure bill on Nov 5. The bill has now moved to President Biden for his signature. The legislation was approved in a 228-206 vote.

Going on, consumer confidence in the United States rose in October primarily on the heels of easing Delta variant concerns, improving labor market conditions, rebounding U.S. economy from the pandemic-led slump and accelerated coronavirus vaccine rollouts. The Conference Board's measure of consumer confidence index stands at 113.8 in comparison to 109.8 in September. The metric has finally broken the streak of three consecutive monthly declines. October’s reading also beat the consensus estimate of the metric, coming in at 108.3, per a Reuters’ poll. The metric continues to be below the pre-pandemic level of 132.6 in February 2020.

Consumers seem to be looking to buy homes, motor vehicles and major household durables. In fact, the buying attitude for vehicles and homes is expanding. The survey also showed that the proportion of the population planning to go on vacation has shot up to the highest level since February 2020, as mentioned in a Reuters article.

ETF Strategies to Follow

Here we discuss certain ETF strategies to help investors gain from optimism surrounding the upbeat earnings season and strong jobs report 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), VictoryShares USAA MSCI USA Value Momentum ETF (ULVM) and SPDR Russell 1000 Momentum Focus ETF (ONEO) (read: Join the Stupendous Wall Street Rally With These ETFs).

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), Schwab U.S. Large-Cap Growth ETF (SCHG) and Vanguard S&P 500 Growth ETF (VOOG) (read: Here's Why Growth ETFs Are Attractive Bets Right Now).

Try the ETFs to Gain From the Cyclical Sectors

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. Cyclical sectors outperform the defensive ones when rates normalize. In a growing economy, most sectors surge on a wealth effect, with a few more cyclical corners making the most of the rally.

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: 4 Sector ETFs & Stocks for Bountiful Returns in November).

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 mainly led 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).

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