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4 Top-Ranked Sector ETFs to Buy for June

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Wall Street has been on a tough ride this year. To start June, the stocks are still struggling to find a footing with the major indices declining nearly 1% last week. The Dow Jones Industrial Average fell for the ninth in 10 week, while the S&P 500 and the NASDAQ Composite Index logged their eighth losing week in nine.

Russia’s invasion of Ukraine, tightening monetary policy and surging commodity prices continued to weigh on investors’ sentiment. The United States has added 390,000 jobs in May, the slowest pace of growth since April last year, while the unemployment rate remained at 3.6%. Wages grew 5.2%, down from 5.5% in April.

The central bank took the most aggressive policy action in decades to combat soaring inflation by raising rates by 50 bps last month and pushing the benchmark above 0.75%. The hike marked the biggest interest-rate increase since 2000. Overall, an increase in interest rates means higher loan rates for consumers and businesses, including mortgages, credit cards and auto loans.

However, the initial phase of the rate increase will be good for stocks as it will reflect an improving economy. The latest Fed minutes rekindled some interest in the stock market. The minutes showed that the central bank would continue raising interest rates by half a percentage point each in June and July to combat surging inflation and avoid an economic downturn. The initial phase of the rate increase will be good for stocks as it will reflect an improving economy. Additionally, manufacturing activity picked up in May (read: Fed Minutes Rekindle Optimism: 5 ETFs That Surged the Most).

Against such a backdrop, investors could be well served by ETFs from sectors that house top-ranked industries.

Here’s How to Find the Top-Performing Sectors

While identifying the top-performing sector is a daunting task, the Zacks Industry Rank makes this process simpler. The Zacks Industry Rank is determined by calculating the average Zacks Rank for each stock in the industry and then assigning a rank to it. First, we selected the best industries that have a top Zacks Rank.

A top Zacks Industry Rank means that more stocks within that group are seeing upward earnings estimate revisions. Since an industry is a group of stocks in a similar business, this is the perfect way to size it up (read: all the Top Ranked ETFs).

The Zacks Industry classification divides the business world into 16 sectors, comprising 60 medium or M-level industries and 260 plus or X-level industries. We rank all 260 plus X-level industries based on the earnings outlook of the constituent companies into two groups: the top half (i.e., industries with the best average Zacks Rank) and the bottom half (the industries with the worst average Zacks Rank).

The top 132 Zacks Ranked industries would be in the top 50% of all X-level industries, whereas the bottom 133 Zacks Ranked industries would be in the bottom 50%.

Energy

Oil resumed its strength lately and reached its highest levels since March. The rally is driven by the easing of COVID-19 restrictions in China and the European Union agreement to ban 90% of Russian crude by the end of the year. The dual news will continue to bolster demand and exacerbate worries over the already tightening supply. Additionally, an inflationary environment in many countries as well as the prospect of rising demand from the start of the upcoming U.S. summer driving season led to a spike in oil price (read: Can Energy ETFs Stay Hot?).

Almost 90% of the industries under this sector are top-ranked with Exploration and Production, Royalty Trust, Refining and Marketing, Exploration and Production – Canadian all having an Industry Rank of top 2%.

SPDR S&P Oil & Gas Exploration & Production ETF (XOP - Free Report) : It provides exposure to 61 oil and gas exploration and production companies by tracking the S&P Oil & Gas Exploration & Production Select Industry Index. SPDR S&P Oil & Gas Exploration & Production ETF has AUM of $5.7 billion and trades in an average daily volume of 10.2 million shares. The fund charges 35 bps in fees per year and has a Zacks ETF Rank #1 (Strong Buy) with a High risk outlook.

Materials

The materials sector, which tends to be the most sensitive to global economic growth expectations, has been performing well as prices of various materials have been on the rise. Additionally, a tight policy means solid economic growth, which in turn results in higher demand for materials. This has made the sector attractive. About 70% of the industries fall under the top-ranked category. Fertilizers, steel specialty and producers, paper and related Products, and diversified chemical are placed in the top 28%.   

Materials Select Sector SPDR (XLB - Free Report) : Materials Select Sector SPDR is the most popular material ETF that follows the Materials Select Sector Index. It manages about $7.6 billion in its asset base and trades in volumes as heavy as around 9 million shares. Materials Select Sector SPDR holds about 28 securities in its basket and charges 10 bps in fees per year from its investors.

In terms of industrial exposure, chemicals dominates the portfolio with a 68.7% share, while metals & mining and containers & packaging round off the top three positions. The product has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

Transportation

The transport sector has bounced back strongly, with more Americans returning to traveling. A strong rebound in summer travel bookings due to an accelerating return of business and international travel along with vaccine acceptance, and reopening of borders will propel the sector higher. Shipping, truck, and equipment and leasing are placed in the top-ranked industries. In particular, the ongoing supply chain issues around the world continued to bolster the demand for shipping, pushing the rates higher.

SonicShares Global Shipping ETF (BOAT - Free Report) : It provides pure-play exposure to the global maritime shipping industry by tracking the Solactive Global Shipping Index. The index consists of global shipping companies engaged in the maritime transportation of goods and raw materials, including consumer and industrial products, vehicles, dry bulk, crude oil and liquefied natural gas. SonicShares Global Shipping ETF holds 50 stocks in its basket and has amassed $35.1 million in its asset base. The fund charges 69 bps in annual fees and trades in an average daily volume of 39,000 shares (read: 5 Sector ETFs That Beat the Market in May).

Industrials

This sector has been flourishing. Metal products boast a top industry rank and are expected to outperform, followed by pipe and tube (top 2%), wire and cable products (top 2%) and containers - paper and packaging (top 11%).

iShares U.S. Industrials ETF (IYJ - Free Report) : This product gives exposure to U.S. companies that produce goods used in construction and manufacturing by tracking Russell 1000 Industrials 40 Act 15/22.5 Daily Capped Index. iShares U.S. Industrials ETF is tilted toward capital goods’ companies at 42.6%, while software services and transportation round off the next two spots with double-digit exposure each.

iShares U.S. Industrials ETF has an AUM of $1.3 billion and an average daily volume of around 134,000 shares. It charges 41 bps in annual fees and has a Zacks ETF Rank #2 with a Medium risk outlook.