Wall Street has rallied hard lately on vaccine distribution, decent corporate earnings and strong cash pile-up at the household and corporate levels. The S&P 500 touched a record high on the first trading day of 2022 while the Dow Jones hit the all-time high levels for two days in a row this year. The two indexes are currently at 4,793.54 and 36,799.65, respectively. However, the year 2022 has brought about rising rate worries.
The Fed is expected to enact its
first rate hike in three years in about two months to counter inflation. The U.S. central bank has already paced up QE tapering, upped its economic growth projections, raised its inflation outlook and cut the unemployment rate projections.
The Fed’s December meeting projections revealed that 12 out of 18 FOMC members expect at least three rate increases in 2022. All 18 policymakers have also indicated the possibility of at least one rate hike before 2022 end (read:
Warm Up Your Portfolio With These ETFs This Winter).
If rising rate worries pick up momentum, we may see a cut-back on upbeat sentiments. Hence, it is intriguing to pick ETFs that are trading at a bargain and have strong potential. These ETFs have a Zacks Rank #1 (Strong Buy) or 2 (Buy).
ETFs in Focus Vanguard Financials ETF ( VFH Quick Quote VFH - Free Report) – Zacks Rank #1; P/E: 11.50X; 1-Month Performance: 3.96%
A clear beneficiary of rising rates is banks. As banks seek to borrow money at short-term rates and lend at long-term rates, a steepening yield curve earns more on lending and pays less on deposits, thereby leading to a wider spread. This expands net margins and increases banks’ profits.
First Trust Health Care AlphaDEX ETF ( FXH Quick Quote FXH - Free Report) – Zacks Rank #2; P/E: 18.93X; 1-Month Performance: 6.26%
Higher demand for drugs, testing and vaccines for COVID-19 is a plus for the sector. The valuation of the sector is also compelling.
iShares U.S. Home Construction ETF ( ITB Quick Quote ITB - Free Report) – Zacks Rank #2; P/E: 16.59X; 1-Month Performance: 2.52%
The thirst for home buying has risen even in the face of increasing housing prices and supply-chain disturbances, thus benefiting homebuilders. No wonder, existing home sales data have come in strong.
Global X U.S. Infrastructure Development ETF ( PAVE Quick Quote PAVE - Free Report) – Zacks Rank #2; P/E: 16.71X; 1-Month Performance: 3.66%
The passage of the $1.2 trillion U.S. infrastructure bill is a plus for the sector. The infrastructure bill provides $100 billion toward roads, bridges and other major projects. The plan allocates $39 billion to modernize public transit and improve access for disabled people. In addition, the bill has proposed $66 billion for passenger and freight rail, $15 billion for electric vehicles and buses, and $17 billion for airports, ports and waterways (read:
4 Sector ETFs to Gain from Infrastructure Bill). Invesco Dynamic Food & Beverage ETF ( PBJ Quick Quote PBJ - Free Report) – Zacks Rank #2; P/E: 17.84X; 1-Month Performance: 7.02%
Demand for food and beverage should remain in the sweet spot as these are necessary items and less ruffled by economic weakness, if there is any.
Invesco PureBeta MSCI USA Small Cap ETF ( PBSM Quick Quote PBSM - Free Report) – Zacks Rank #2; P/E: 18.68X; 1-Month Performance: 5.28%
Vaccine boosters and antiviral therapies are available now. This should boost the U.S. economy in the coming days. The Fed is also likely to hike rates this year, which may give more strength to the greenback. Since small-cap stocks are more closely tied to the domestic economy, any improvement in the U.S. economy and dollar would be great for such stocks (read:
5 Reasons to Bet on Small-Cap ETFs).