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Is Recession Fear Exaggerated? 5 Top ETF Plays for Q2

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The outcome of the latest Fed meeting which reinforced the need for faster Fed rate hikes to counter accelerating inflation, caused an inverted yield curve last week. The latest Fed meeting held on Mar 16 came across as hawkish.

The Federal Reserve raised interest rates by a quarter of a percentage point and projected that its policy rate would be in the range of 1.75% and 2% by the year's end in a newly aggressive stance to fight the red-hot inflation.

Hence, new Federal Reserve projections indicate six more rate hikes this year, per CNBC. The Fed downgraded its forecast for 2022 median real GDP growth from 4% in December to 2.8% for 2022. However, it kept the growth rate expectations same at 2.2% for 2023 and 2% for 2024.

Recession Down the Line?

All these sparked a safe-haven rally and led the benchmark 10-year U.S. Treasury yield to drop to 2.38% on Apr 1 from 2.48% from Mar 25. The spread between benchmark U.S. treasury yield and the three-year treasury yield were negative 20 bps on Apr 1.

When the curve inverts, “there has been a better than two-thirds chance of a recession at some point in the next year and a greater than 98% chance of a recession at some point in the next two years,” according to Bespoke, as quoted on CNBC.

However, there is often a long gap between the first inversion of the yield curve and the real occurrence of recession. Per analysts, there needs to be validating signs before investors should be really concerned about an imminent recession. Plus, many economists believe the curve needs to stay inverted for a considerable period before recessionary fears are felt.

According to MUFG Securities, the yield curve inverted 422 days ahead of the 2001 recession, 571 days ahead of the 2007-to-2009 recession and 163 days before the 2020 recession, as quoted on a CNBC article. The CNBC article quoted that Evercore ISI sees a 25% chance of a U.S. recession.

ETFs to Tap

Against this backdrop, below we highlight a few top-ranked ETFs (Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy)) that beat the S&P 500 (up 3.6%) past month and have P/E ratios less than the S&P 500 (25.57X).

First Trust Materials AlphaDEX ETF (FXZ) – Up 12.6% Past Month; P/E: 7.50X; Zacks Rank: #1

The materials space has remained strong as the accelerated coronavirus vaccine rollout and the passage of the $1.2-trillion U.S. infrastructure bill are favoring the sector. However, the latest tailwind is the escalating tension between Russia and Ukraine that is aiding materials’ prices. Both countries are metal-rich. As prices of various materials have been on the rise, the material sector has been witnessing solid growth.

Vanguard Energy ETF (VDE - Free Report) – Up 10.4% Past Month; P/E: 16.60X; Zacks Rank: #2

Oil prices have been rising since the beginning of 2022. The upside in crude oil prices was triggered by factors like easing Omicron variant concerns, supply shortages, and geopolitical tensions in Eastern Europe and the Middle East.

iShares U.S. Infrastructure ETF (IFRA - Free Report) – Up 8.15% Past Month; P/E: 14.66X; Zacks Rank: #2

The fund taps U.S. companies that have infrastructure exposure and that could benefit from a potential increase in domestic infrastructure activities. The $1.2-trillion worth of U.S. infrastructure bill is a plus for the space.

Health Care Select Sector SPDR ETF (XLV - Free Report) – Up 7.16% Past Month; P/E: 15.45X; Zacks Rank: #1

The healthcare sector is a good defensive investment option. Currently, the Russia-Ukraine war crisis and the Fed’s hawkish stance on rate hikes Plus, the pandemic also triggered a race to introduce vaccines, tests and treatment options, placing the healthcare sector in a sweet spot.

SPDR Portfolio S&P 500 High Dividend ETF (SPYD - Free Report) – Up 7.10% Past Month; P/E: 13.08X; Zacks Rank: #1

The underlying S&P 500 High Dividend Index is designed to measure the performance of the top 80 dividend-paying securities listed on the S&P 500 Index, based on dividend yield. The fund yields 3.54% annually.

 


 

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