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4 Sector ETFs to Bet On in 2022

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After a great 2021 (for stocks), investors will now be mulling over what’s in store for this year. The S&P 500 gained 26.89% in 2021, marking the gauge’s third straight positive year. The Dow and the Nasdaq also recorded three-year winning streaks, advancing 18.73% and 21.39% for the year, respectively.

The year 2022 will be marked with a hawkish Fed and the resultant rising rate worries, the continuation of sky-high inflation (at least in the first half of the year) due to global supply chain issues, reopening trades and chances of more therapies and COVID-19 vaccines from different pharma companies (read: 7 ETF Predictions for 2022).

Against this backdrop, below we highlight a few sector ETFs that are great bets for 2022.

Financials

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 ends (read: Warm Up Your Portfolio With These ETFs This Winter).

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.Financial Select Sector SPDR ETF (XLF - Free Report) has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.

Energy

The Energy sector tends to perform well in an inflationary environment. The revenues of energy stocks are dependent on energy prices, a key factor of inflation indices. Such firms surpassed inflation 71% of the time within a time span of 1973-2020 and delivered an annual real return of 9.0% per year on average.

The operating backdrop of the sector is bullish too. The sector remains the outperformer to start the New Year as oil prices are rising further on supply disruptions. Growing demand with the easing of pandemic restrictions are the positives for the sector. Also, the OPEC has stuck to their limit of output raise for February due to Omicron risks instead of raising it further. VanEck Vectors Oil Services ETF (OIH - Free Report) could be good play out here.

Real Estate

Home prices have been trending up on higher demand and increasing inflation. Thanks to rising home prices, affordability is falling. Demand for renting has been increasing, which is pushing up shelter costs (read: Why Real Estate ETFs are Likely to Beat Homebuilding in 2022).

Apartment rent and occupancy hit new records in November, even as the rental market entered its traditionally sluggish season. In a rising-inflation environment, both resale value of the property and rental income, rise with price inflation.

Interest rates are still at pretty low levels, though gradually increasing. This makes high-yielding real estate investing lucrative. The rise in mortgage rates amid a hawkish Fed in 2022 may spell trouble for homebuilding stocks and favor the real estate ones.

Some of the decent real estate ETF plays right now areReal Estate Select Sector SPDR ETF (XLRE - Free Report) (yields 2.75% annually),U.S. Diversified Real Estate ETF (PPTY - Free Report) (yields 2.93% annually) andVanEck Vectors Mortgage REIT Income ETF (MORT - Free Report) (yields 8.09% annually).

Industrials

More capex and activities are likely in 2022, which will boost industrial ETFs like Industrial Select Sector SPDR Fund (XLI - Free Report) . Since industrial activities will be on the rise, demand for materials should go up. Biden’s massive infrastructure plan is another plus for this segment. Investors can thus play the materials ETF (XLB) to make the most of this surge.

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