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Uncertainty surrounding the timing of rate cuts has been playing foul on the stock market this year. In a CBS interview on "60 Minutes," Fed Chair Jerome Powell vowed that the central bank will proceed carefully with interest rate cuts this year and will likely move at a considerably slower pace than market expectations.
Traders have been scaling back rate cuts bets since the beginning of the year and are currently pricing in only a 15% chance of a cut in March, the CME FedWatch tool showed, compared with a 69% chance at the start of the year. They are also now pricing in 115 basis points (bps) of cuts this year, compared with around 150 bps of easing anticipated in early January.
Powell expressed confidence in the economic growth and jobs market. The economy grew at a much more rapid pace than expected, with GDP rising at a 3.3% annualized rate in the fourth quarter of 2023, up from the Wall Street consensus estimate growth rate of 2%. The economy added 353,000 new jobs in January, while unemployment remained at 3.7%. Average hourly pay is also rising, with the fastest monthly gain in nearly two years in January. U.S. services industries are also growing more strongly than economists expected, led by health care and social assistance.
Consumer confidence in the economy hit its highest level in more than two years, according to the latest surveys released by Gallup and the Conference Board. However, the Fed notes that prices in the economy are still comparatively high even though inflation has come down from just over 9% to about 3%. So, the central bank wants to gain “greater confidence” that inflation is approaching its 2% goal (read: 4 ETF Zones to Invest in as Fed Signals No Rate Cuts in March).
Amid the strong economy, investors could be well served by ETFs from top-ranked sectors.
Here’s How to Find the Top-Ranked Sectors
The Zacks Rank is one of the best ways to rank sectors. And this is done with the Zacks Sector Rank. After all, since a sector is nothing more than a group of stocks in a similar business, this is the perfect way to size up a sector.
The Zacks Sector Rank is determined by calculating the average Zacks Rank for all the stocks in the sector and then assigning an ordinal rank to it. For example, a sector with an average Zacks Rank of 1.6 is better than a sector with an average Zacks Rank of 2.3. So, the sector with the better average Zacks Rank would get a better Zacks Sector Rank.
Zacks classifies all stocks into one of 16 sectors. The average Zacks Rank is calculated for every sector every day. So, if a sector has the best average Zacks Rank, it would be considered the top sector (1 out of 16), which would place it in the top 1% of Zacks Rank Sectors. The top 8 Zacks Ranked Sectors would be in the top 50% of sectors, whereas the bottom 8 Zacks Ranked Sectors would be in the bottom 50% of sectors. Then, we selected one ETF from the five top-ranked sectors that have a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold).
Construction
The U.S. housing sector has been performing well on solid demand and a lack of existing inventory. The recent decline in mortgage rates has prompted an increase in prospective buyers, leading to an uptick in sales and rising homebuilder confidence (read: Time for Housing ETFs This Spring?).
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 $1.6 billion and an average daily volume of 3 million shares. The product charges 35 bps in annual fees and has a Zacks ETF Rank #3.
Industrials
The industrials sector is set to benefit as business conditions have improved and demand seems to be solid. iShares U.S. Industrials ETF (IYJ - Free Report) , with a Zacks ETF Rank #2, looks like an exciting pick. It offers exposure to 185 U.S. companies that produce goods used in construction and manufacturing by tracking the Russell 1000 Industrials 40 Act 15/22.5 Daily Capped Index.
iShares U.S. Industrials ETF has an AUM of $1.3 billion and an average daily volume of around 53,000 shares. It charges 40 bps in annual fees and has a Zacks ETF Rank #2.
Aerospace
The aerospace and defense sector tends to benefit from rising geopolitical tensions, which result in increased defense spending worldwide. iShares U.S. Aerospace & Defense ETF (ITA - Free Report) provides exposure to U.S. companies that manufacture commercial and military aircraft and other defense equipment by tracking the Dow Jones U.S. Select Aerospace & Defense Index. It holds 35 stocks in its basket with AUM of $5.7 billion and an expense ratio of 0.40%.
The Auto sector falls in the top 32% of the Zacks Sector Rank. It has a modest growth outlook for 2024. Sales of new vehicles in the United States are expected to increase slightly to around 15.7 million sales and the supply of new vehicles is expected to return to more normal levels. The affordability of vehicles is also expected to improve.
First Trust S-Network Future Vehicles & Technology ETF (CARZ - Free Report) offers pure-play global exposure to 101 auto stocks by tracking the S-Network Electric & Future Vehicle Ecosystem Index. It has $35.2 million in AUM and trades in a small average daily trading volume of about 6,000 shares. First Trust S-Network Future Vehicles & Technology ETF charges 70 bps in fees per year and has a Zacks ETF Rank #3 with a High risk outlook.
Healthcare
The outlook for the healthcare sectors appears solid given several encouraging trends. These include cutting-edge medicines, new drug approvals, accelerated pace of innovation, promising drug launches, cost-cutting efforts, an aging population, technological advancements, expanding insurance coverage, the rising middle class, demand for new drugs, and ever-increasing health care spending. Further, deal activities will also act as catalysts for the sector (read: Healthcare ETFs Start 2024 on a Positive Note).
Health Care Select Sector SPDR Fund (XLV - Free Report) is the most popular healthcare ETF with an AUM of $39.5 billion and an average daily volume of 7.5 million shares. It follows the Health Care Select Sector Index and holds 64 securities in its basket. Pharma takes the largest share at 30.3% from a sector look, while healthcare providers and services, healthcare equipment and supplies, biotech and life sciences tools & services have double-digit exposure each. Health Care Select Sector SPDR Fund charges 9 bps in annual fees and has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.
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Forget Rate Cuts, Buy Top-Ranked Sector ETFs
Uncertainty surrounding the timing of rate cuts has been playing foul on the stock market this year. In a CBS interview on "60 Minutes," Fed Chair Jerome Powell vowed that the central bank will proceed carefully with interest rate cuts this year and will likely move at a considerably slower pace than market expectations.
Traders have been scaling back rate cuts bets since the beginning of the year and are currently pricing in only a 15% chance of a cut in March, the CME FedWatch tool showed, compared with a 69% chance at the start of the year. They are also now pricing in 115 basis points (bps) of cuts this year, compared with around 150 bps of easing anticipated in early January.
Powell expressed confidence in the economic growth and jobs market. The economy grew at a much more rapid pace than expected, with GDP rising at a 3.3% annualized rate in the fourth quarter of 2023, up from the Wall Street consensus estimate growth rate of 2%. The economy added 353,000 new jobs in January, while unemployment remained at 3.7%. Average hourly pay is also rising, with the fastest monthly gain in nearly two years in January. U.S. services industries are also growing more strongly than economists expected, led by health care and social assistance.
Consumer confidence in the economy hit its highest level in more than two years, according to the latest surveys released by Gallup and the Conference Board. However, the Fed notes that prices in the economy are still comparatively high even though inflation has come down from just over 9% to about 3%. So, the central bank wants to gain “greater confidence” that inflation is approaching its 2% goal (read: 4 ETF Zones to Invest in as Fed Signals No Rate Cuts in March).
Amid the strong economy, investors could be well served by ETFs from top-ranked sectors.
Here’s How to Find the Top-Ranked Sectors
The Zacks Rank is one of the best ways to rank sectors. And this is done with the Zacks Sector Rank. After all, since a sector is nothing more than a group of stocks in a similar business, this is the perfect way to size up a sector.
The Zacks Sector Rank is determined by calculating the average Zacks Rank for all the stocks in the sector and then assigning an ordinal rank to it. For example, a sector with an average Zacks Rank of 1.6 is better than a sector with an average Zacks Rank of 2.3. So, the sector with the better average Zacks Rank would get a better Zacks Sector Rank.
Zacks classifies all stocks into one of 16 sectors. The average Zacks Rank is calculated for every sector every day. So, if a sector has the best average Zacks Rank, it would be considered the top sector (1 out of 16), which would place it in the top 1% of Zacks Rank Sectors. The top 8 Zacks Ranked Sectors would be in the top 50% of sectors, whereas the bottom 8 Zacks Ranked Sectors would be in the bottom 50% of sectors. Then, we selected one ETF from the five top-ranked sectors that have a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold).
Construction
The U.S. housing sector has been performing well on solid demand and a lack of existing inventory. The recent decline in mortgage rates has prompted an increase in prospective buyers, leading to an uptick in sales and rising homebuilder confidence (read: Time for Housing ETFs This Spring?).
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 $1.6 billion and an average daily volume of 3 million shares. The product charges 35 bps in annual fees and has a Zacks ETF Rank #3.
Industrials
The industrials sector is set to benefit as business conditions have improved and demand seems to be solid. iShares U.S. Industrials ETF (IYJ - Free Report) , with a Zacks ETF Rank #2, looks like an exciting pick. It offers exposure to 185 U.S. companies that produce goods used in construction and manufacturing by tracking the Russell 1000 Industrials 40 Act 15/22.5 Daily Capped Index.
iShares U.S. Industrials ETF has an AUM of $1.3 billion and an average daily volume of around 53,000 shares. It charges 40 bps in annual fees and has a Zacks ETF Rank #2.
Aerospace
The aerospace and defense sector tends to benefit from rising geopolitical tensions, which result in increased defense spending worldwide. iShares U.S. Aerospace & Defense ETF (ITA - Free Report) provides exposure to U.S. companies that manufacture commercial and military aircraft and other defense equipment by tracking the Dow Jones U.S. Select Aerospace & Defense Index. It holds 35 stocks in its basket with AUM of $5.7 billion and an expense ratio of 0.40%.
iShares U.S. Aerospace & Defense ETF trades in an average daily volume of around 435,000 shares. It has a Zacks ETF Rank #2 with a Medium risk outlook (read: Can Aerospace & Defense ETFs Rise Amid Ongoing Geopolitical Conflicts?).
Auto
The Auto sector falls in the top 32% of the Zacks Sector Rank. It has a modest growth outlook for 2024. Sales of new vehicles in the United States are expected to increase slightly to around 15.7 million sales and the supply of new vehicles is expected to return to more normal levels. The affordability of vehicles is also expected to improve.
First Trust S-Network Future Vehicles & Technology ETF (CARZ - Free Report) offers pure-play global exposure to 101 auto stocks by tracking the S-Network Electric & Future Vehicle Ecosystem Index. It has $35.2 million in AUM and trades in a small average daily trading volume of about 6,000 shares. First Trust S-Network Future Vehicles & Technology ETF charges 70 bps in fees per year and has a Zacks ETF Rank #3 with a High risk outlook.
Healthcare
The outlook for the healthcare sectors appears solid given several encouraging trends. These include cutting-edge medicines, new drug approvals, accelerated pace of innovation, promising drug launches, cost-cutting efforts, an aging population, technological advancements, expanding insurance coverage, the rising middle class, demand for new drugs, and ever-increasing health care spending. Further, deal activities will also act as catalysts for the sector (read: Healthcare ETFs Start 2024 on a Positive Note).
Health Care Select Sector SPDR Fund (XLV - Free Report) is the most popular healthcare ETF with an AUM of $39.5 billion and an average daily volume of 7.5 million shares. It follows the Health Care Select Sector Index and holds 64 securities in its basket. Pharma takes the largest share at 30.3% from a sector look, while healthcare providers and services, healthcare equipment and supplies, biotech and life sciences tools & services have double-digit exposure each. Health Care Select Sector SPDR Fund charges 9 bps in annual fees and has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.