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4 Top-Ranked Sector ETFs to Buy in the Second Half
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After a solid first-half performance, Wall Street is witnessing volatile trading amid growing fears that the Fed will continue to raise interest rates this year. But a still resilient economy and solid historical trends might drive stocks higher once again.
Rate Hike Bets Rise
After a pause in rate hikes in the last meeting, the Fed has signaled more interest rate increases this year that could hurt economic growth and in turn, weigh on the stocks. As inflation remains above the Fed’s target range of 2%, officials indicated there could be two more quarter-percentage-point increases this year.
The latest job data has heightened fears that the central bank may have reasons to resume rate hikes later this month. According to CME Group’s FedWatch tool, traders kept their bets on a resumption in rate hikes later this month, pricing in a 92% chance of a quarter-point hike on Jul 26 (read: 5 ETF Zones Primed for 2023 Growth Amid Rate Hike Prospects).
Economy Remains Resilient
Economic activity continued to expand at a modest pace, with robust job gains, a low unemployment rate and moderated inflation. Consumer confidence unexpectedly jumped to an 18-month high in June amid lingering fears of a recession. The U.S. housing sector has also shown immense improvement, with homebuilder confidence reaching its highest level in almost a year. Despite the fact that the Fed has raised rates this year, interest rates have largely remained low.
Solid Historical Trends
The solid first-half trend is likely to continue in the second half if history is any guide. A recent analysis by Sam Stovall, chief investment strategist at CFRA, revealed that a strong first half of the year in the stock market is highly correlated with gains in the second half. Historical data analysis by Stovall reveals that since 1945, the S&P 500 has typically seen an average increase of 5% in the second half of the year, provided the index registered a positive return in the first half. The gains in the latter half of the year were even more significant, approximately 6%, when the index experienced a rise of 5% or more during the first half (read: ETFs to Tap S&P 500 After Best 1H Since 2009).
Furthermore, if the first-half gains exceeded 10%, the second half saw an average increase of 8% — a figure that doubles the average second-half return across all years. Given that the S&P 500 has already risen nearly 15% this year, Stovall advises investors to "hold onto their hats." Drawing from historical trends, he anticipates a potentially "stellar" performance in the second half of the year.
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 are in the top 50% of all X-level industries, whereas the bottom 133 Zacks Ranked industries are in the bottom 50%.
Then, we selected one ETF from the industries that have a Zacks Rank #1 (Strong Buy) or #2 (Buy).
Construction
The U.S. housing sector has shown immense improvement on solid demand and a lack of existing inventory. Builders have become more optimistic due to ongoing gradual improvements in supply chains, despite difficulties in obtaining builder and developer loans over the last year. Almost all the industries in this sector are top-ranked, with Homebuilders, and Concrete and Aggregates having an Industry Rank in the top 5% (read: Homebuilder Confidence Hits 1-Year High: ETFs to Ride On).
SPDR S&P Homebuilders ETF (XHB - Free Report) provides exposure to homebuilders with a well-diversified exposure across building products, homebuilding and home improvement retail. It tracks the S&P Homebuilders Select Industry Index, holding 35 stocks in its basket. SPDR S&P Homebuilders ETF is the most popular option in the homebuilding space, with AUM of $1.3 billion and an average daily volume of 3 million shares. The product charges 35 bps in annual fees and has a Zacks ETF Rank #2.
Industrials
The industrials sector is set to benefit as business conditions have improved and demand seems to be solid. About 75% of the industries fall under the top-ranked category. Construction and Mining, Glass Products, Manufacturing – Electronics and Steel - Pipe and Tube are placed in the top 11%.
First Trust Industrials/Producer Durables AlphaDEX Fund (FXR - Free Report) , with a Zacks ETF Rank #2, looks like an exciting pick. It tracks the StrataQuant Industrials Index and offers exposure to 132 U.S. companies. It has exposure to various industries like Industrial Support Services, Construction and Materials, Industrial Transportation, General Industrials, and Electronic and Electrical Equipment. First Trust Industrials/Producer Durables AlphaDEX Fund has an AUM of $1.7 billion and an average daily volume of around 146,000 shares. It charges 61 bps in annual fees.
Consumer Staples
The consumer staples sector generally acts as a haven amid political and economic turmoil. Stocks in these sectors generally outperform during periods of low growth and high uncertainty. Publishing – Newspapers, Cosmetics, Soap and Cleaning Materials, and Tobacco are placed in the top 23% of industries (read: 5 ETF Underdogs of 1H Likely to Turnaround in 2H).
Consumer Staples Select Sector SPDR Fund (XLP - Free Report) is the most popular consumer staples ETF with AUM of $17.3 billion and an average daily volume of 12 million shares. It offers exposure to companies primarily involved in the development and production of consumer products that cover food and drug retailing, beverages, food products, tobacco, household products, and personal products. Consumer Staples Select Sector SPDR Fund follows the Consumer Staples Select Sector Index and holds 37 stocks in its basket. XLP charges 10 bps in annual fees and currently has a Zacks Rank #2.
Healthcare
If volatility and uncertainty persist, the healthcare sector will gain momentum on investors’ rush to safety. The sector is non-cyclical, which, in turn, provides a cushion to the portfolio. Additionally, recessionary fears have raised the appeal for defensive bets. Dental Supplies, Hospitals, and Nursing Homes boast a solid industry rank in the top 11%.
iShares U.S. Healthcare ETF (IYH - Free Report) offers exposure to 117 U.S. healthcare equipment and services, pharmaceuticals, and biotechnology companies by tracking the Russell 1000 Health Care RIC 22.5/45 Capped Gross Index. It has amassed $3.1 billion in its asset base, while charging 39 bps in annual fees. IYH trades in a moderate volume of around 43,000 shares a day and has a Zacks ETF Rank #2.
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4 Top-Ranked Sector ETFs to Buy in the Second Half
After a solid first-half performance, Wall Street is witnessing volatile trading amid growing fears that the Fed will continue to raise interest rates this year. But a still resilient economy and solid historical trends might drive stocks higher once again.
Rate Hike Bets Rise
After a pause in rate hikes in the last meeting, the Fed has signaled more interest rate increases this year that could hurt economic growth and in turn, weigh on the stocks. As inflation remains above the Fed’s target range of 2%, officials indicated there could be two more quarter-percentage-point increases this year.
The latest job data has heightened fears that the central bank may have reasons to resume rate hikes later this month. According to CME Group’s FedWatch tool, traders kept their bets on a resumption in rate hikes later this month, pricing in a 92% chance of a quarter-point hike on Jul 26 (read: 5 ETF Zones Primed for 2023 Growth Amid Rate Hike Prospects).
Economy Remains Resilient
Economic activity continued to expand at a modest pace, with robust job gains, a low unemployment rate and moderated inflation. Consumer confidence unexpectedly jumped to an 18-month high in June amid lingering fears of a recession. The U.S. housing sector has also shown immense improvement, with homebuilder confidence reaching its highest level in almost a year. Despite the fact that the Fed has raised rates this year, interest rates have largely remained low.
Solid Historical Trends
The solid first-half trend is likely to continue in the second half if history is any guide. A recent analysis by Sam Stovall, chief investment strategist at CFRA, revealed that a strong first half of the year in the stock market is highly correlated with gains in the second half. Historical data analysis by Stovall reveals that since 1945, the S&P 500 has typically seen an average increase of 5% in the second half of the year, provided the index registered a positive return in the first half. The gains in the latter half of the year were even more significant, approximately 6%, when the index experienced a rise of 5% or more during the first half (read: ETFs to Tap S&P 500 After Best 1H Since 2009).
Furthermore, if the first-half gains exceeded 10%, the second half saw an average increase of 8% — a figure that doubles the average second-half return across all years. Given that the S&P 500 has already risen nearly 15% this year, Stovall advises investors to "hold onto their hats." Drawing from historical trends, he anticipates a potentially "stellar" performance in the second half of the year.
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 are in the top 50% of all X-level industries, whereas the bottom 133 Zacks Ranked industries are in the bottom 50%.
Then, we selected one ETF from the industries that have a Zacks Rank #1 (Strong Buy) or #2 (Buy).
Construction
The U.S. housing sector has shown immense improvement on solid demand and a lack of existing inventory. Builders have become more optimistic due to ongoing gradual improvements in supply chains, despite difficulties in obtaining builder and developer loans over the last year. Almost all the industries in this sector are top-ranked, with Homebuilders, and Concrete and Aggregates having an Industry Rank in the top 5% (read: Homebuilder Confidence Hits 1-Year High: ETFs to Ride On).
SPDR S&P Homebuilders ETF (XHB - Free Report) provides exposure to homebuilders with a well-diversified exposure across building products, homebuilding and home improvement retail. It tracks the S&P Homebuilders Select Industry Index, holding 35 stocks in its basket. SPDR S&P Homebuilders ETF is the most popular option in the homebuilding space, with AUM of $1.3 billion and an average daily volume of 3 million shares. The product charges 35 bps in annual fees and has a Zacks ETF Rank #2.
Industrials
The industrials sector is set to benefit as business conditions have improved and demand seems to be solid. About 75% of the industries fall under the top-ranked category. Construction and Mining, Glass Products, Manufacturing – Electronics and Steel - Pipe and Tube are placed in the top 11%.
First Trust Industrials/Producer Durables AlphaDEX Fund (FXR - Free Report) , with a Zacks ETF Rank #2, looks like an exciting pick. It tracks the StrataQuant Industrials Index and offers exposure to 132 U.S. companies. It has exposure to various industries like Industrial Support Services, Construction and Materials, Industrial Transportation, General Industrials, and Electronic and Electrical Equipment. First Trust Industrials/Producer Durables AlphaDEX Fund has an AUM of $1.7 billion and an average daily volume of around 146,000 shares. It charges 61 bps in annual fees.
Consumer Staples
The consumer staples sector generally acts as a haven amid political and economic turmoil. Stocks in these sectors generally outperform during periods of low growth and high uncertainty. Publishing – Newspapers, Cosmetics, Soap and Cleaning Materials, and Tobacco are placed in the top 23% of industries (read: 5 ETF Underdogs of 1H Likely to Turnaround in 2H).
Consumer Staples Select Sector SPDR Fund (XLP - Free Report) is the most popular consumer staples ETF with AUM of $17.3 billion and an average daily volume of 12 million shares. It offers exposure to companies primarily involved in the development and production of consumer products that cover food and drug retailing, beverages, food products, tobacco, household products, and personal products. Consumer Staples Select Sector SPDR Fund follows the Consumer Staples Select Sector Index and holds 37 stocks in its basket. XLP charges 10 bps in annual fees and currently has a Zacks Rank #2.
Healthcare
If volatility and uncertainty persist, the healthcare sector will gain momentum on investors’ rush to safety. The sector is non-cyclical, which, in turn, provides a cushion to the portfolio. Additionally, recessionary fears have raised the appeal for defensive bets. Dental Supplies, Hospitals, and Nursing Homes boast a solid industry rank in the top 11%.
iShares U.S. Healthcare ETF (IYH - Free Report) offers exposure to 117 U.S. healthcare equipment and services, pharmaceuticals, and biotechnology companies by tracking the Russell 1000 Health Care RIC 22.5/45 Capped Gross Index. It has amassed $3.1 billion in its asset base, while charging 39 bps in annual fees. IYH trades in a moderate volume of around 43,000 shares a day and has a Zacks ETF Rank #2.