After a solid start to the third quarter, the Wall Street rally fizzled out in mid-August as worries about Fed’s aggressive interest rate hikes and global recession fears resurfaced. In fact, the three main indexes suffered their biggest monthly percentage declines in August since 2015. The weak trend is likely to continue, given rising rates, recession fears, and historical underperformance in September.

Jerome Powell recently said that the Fed would need to keep interest rates high enough to slow the economy “for some time” in order to curb high inflation. While a tight monetary policy "for some time" will bring down inflation from its 40-year high, it means slower growth, a weaker job market and "some pain" for households and businesses.

Bouts of weak economic data across the globe added to global slowdown fears. Economic activity in China, the world's second-largest economy, has been declining and the property sector is also suffering. Euro zone inflation for August also rose to another record high, solidifying the case for a hefty rate hike by the European Central Bank.
 
Further, September is historically the worst month for stocks. Since 1945, the S&P 500 has posted an average loss of 0.6% in September, the worst for any month, with the index advancing only 44% of the time, according to CFRA data. The decline is due to a seasonal phenomenon as investors are more prone to selling than buying when they return from their summer vacations, trading volume after Labor Day is mostly bearish, many mutual funds have fiscal years ending Sep 30, window-dressing is rampant, and investors generally sell stocks to pay tuition bills for their kids’ private schools and colleges (read: Why Low-Volatility ETFs Should Outperform in September).

Against such a backdrop, investors could be well served by ETFs from sectors that house the 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%.

Then, we selected one ETF from that industries that have a top Zacks Rank #1 (Strong Buy) or #2 (Buy).

Energy

Oil price hit the lowest point since January on concerns that a global economic downturn would hurt demand and will weigh on the energy sector. Additionally, Russian president Vladimir Putin has threatened to cut off the energy supply, if price limits are imposed by the West on Russia's oil and gas exports.  

However, the latest OPEC+ output cuts and the unrest in Libya will continue to keep supply at check. Global oil supply could take a hit as the peak U.S. hurricane season approaches. This will provide an upward thrust to the sector in the coming weeks.

Almost 80% of the industries in this sector are top-ranked, with Refining and Marketing, Exploration and Production – Canadian, Field Services, and Drilling having an Industry Rank in the top 10%.

iShares U.S. Oil & Gas Exploration & Production ETF (IEO Quick QuoteIEO - Free Report)

iShares U.S. Oil & Gas Exploration & Production ETF provides exposure to U.S. companies that are engaged in the exploration, production and distribution of oil and gas. It tracks the Dow Jones U.S. Select Oil Exploration & Production Index and holds 50 stocks in its basket. iShares U.S. Oil & Gas Exploration & Production ETF is concentrated on the top firm while other firms hold less than 9% share.

iShares U.S. Oil & Gas Exploration & Production ETF has AUM of $1 billion and trades in an average daily volume of 217,000 shares. The fund charges 39 bps in fees per year and has a Zacks ETF Rank #1 (read: 5 Best-Performing Stocks of the Top ETF of August).

Transportation

The transport sector has bounced back strongly, with more Americans returning to traveling. Truck, services, and air freight and cargo are placed in the top 15% industries.

iShares U.S. Transportation ETF (IYT Quick QuoteIYT - Free Report)

iShares U.S. Transportation ETF tracks the S&P Transportation Select Industry FMC Capped Index, giving investors exposure to a small basket of 49 securities. From a sector perspective, railroads, and air freight & logistics take the largest share at 32% each, while air freight & logistics, trucking and airlines round off the next three spots with a double-digit exposure each.

iShares U.S. Transportation ETF has accumulated $842.7 million in its asset base and sees a solid trading volume of around 146,000 shares a day. It charges 39 bps in annual fees (read: 5 ETF Winners of Q2 Earnings Season).

Finance

A rising rate environment is highly beneficial for the financial sector as it bolsters profits for banks, insurance companies, discount brokerage firms and asset managers. Additionally, financial stocks have become extremely cheap after a heavy sell-off in the first half of the year as rising inflation has led to fears of a recession. This has made the sector attractive. About 60% of the industries fall under the top-ranked category. Financial - SBIC & Commercial Industry, Banks – Northeast,Insurance - Accident and Health and Banks - Midwest(29) are placed in the top 8%.   

Financial Select Sector SPDR Fund (XLF Quick QuoteXLF - Free Report)

Financial Select Sector SPDR Fund ETF seeks to provide exposure to 66 companies in diversified financial services, insurance, banks, capital markets, and mortgage real estate investment trusts.

Financial Select Sector SPDR Fund has AUM of $32.5 billion and charges 10 bps in annual fees. It trades in an average daily volume of 35 million shares and carries a Zacks ETF Rank #1 (read: 5 ETFs That Investors Loved the Most Last Week).

Healthcare

If volatility and uncertainty persist, the healthcare sector will gain momentum on investors’ rush to safety. The sector is non-cyclical in nature, which, in turn, provides a cushion to the portfolio. Additionally, recessionary fears have raised the appeal for defensive bets. Nursing Homes, Biomedical and Genetics and Drugs boast a solid industry rank in the top 32%.

Invesco DWA Healthcare Momentum ETF (PTH Quick QuotePTH - Free Report)

Invesco DWA Healthcare Momentum ETF follows the Dorsey Wright Healthcare Technical Leaders Index and holds a basket of 35 U.S. companies. It has AUM of $256.7 million and charges 60 bps in annual fees. Biotechnology takes the largest share at 42%, while healthcare providers and services and pharmaceuticals round off the next two with double-digit exposure each.

Invesco DWA Healthcare Momentum ETF trades in a light average daily volume of 7,000 shares and has a Zacks ETF Rank #2.