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5 Top-Ranked Sector ETFs to Buy in June

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Wall Street has been on a remarkable rally so far this year, with all three major indices near record highs. Solid corporate earnings, Fed rate cut bets and booming AI have been driving the rally.

Earnings grew 6% in the first quarter of 2024, the highest growth rate seen in nearly two years. The recent economic data showed that the U.S. economy is back on course for another solid GDP gain in the second quarter. U.S. business activity growth accelerated sharply to its fastest pace in more than two years in May after two months of slower growth, led by an upturn in the service sector. Consumer confidence, as indicated by the Conference Board’s gauge of sentiment, increased in May after three months of decline.

Further, Wall Street has become more bullish on stocks, given the improving outlook for both earnings and economic growth. Over the past two weeks, three equity strategists tracked by Yahoo Finance have boosted their year-end targets for the S&P 500. The median target on Wall Street for the benchmark index now sits at 5,250, up from the median target of 4,850 on Dec 30, per Bloomberg data (read: 5 Multi-Billion Dollar ETFs Beating the S&P 500 YTD).

However, uncertainty about the timing of Fed rate cuts will weigh on investors' sentiment in the coming weeks. The latest data from the Institute for Supply Management showed that U.S. manufacturing contracted in May for the 18th time in 19 months, hit particularly hard by high interest rates.

The latest Fed minutes highlight concerns over stubborn inflation. While inflation has eased over the past year, it failed to show further progress toward the Fed’s 2% objective in recent months. As such, the disinflation process would likely take longer than previously thought, per Fed minutes. Additionally, geopolitics will continue to be an overhang.

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 sectors is a daunting task, the Zacks Sector Rank makes this process simpler. 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.

We have selected one ETF, with a Zacks ETF Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold), from some of the top-ranked sectors.

Construction: Zacks Sector Rank 1

Amid the twin headwinds of high prices and still high mortgage rates, the U.S. housing sector looks attractive given that about 70% of the industries in this sector are top-ranked, with Heavy Construction and Homebuilders having an Industry Rank in the top 10%.

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 $1.8 billion and an average daily volume of 2.4 million shares. The product charges 35 bps in annual fees and has a Zacks ETF Rank #3.

Consumer Staples: Zacks Sector Rank 4

The consumer staples saw the Zacks Sector Rank jump by three notches from 7 last week. The 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, Funeral Services, Staples Products, and Soap and Cleaning Materials are placed in the top 19% of industries.

Consumer Staples Select Sector SPDR Fund (XLP - Free Report) is the most popular consumer staples ETF with AUM of $15.2 billion and an average daily volume of 12.5 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 38 stocks in its basket. XLP charges 9 bps in annual fees and currently has a Zacks Rank #3.

Materials - Zacks Sector Rank 5

The materials sector, which tends to be the most sensitive to global economic growth expectations, is expected to see smooth trading given improving global economy. The Zacks Sector Rank moved to 5 from 6 last week.

Vanguard Materials ETF (VAW - Free Report) has amassed $3 billion in its asset base and offers exposure to 116 stocks by tracking the MSCI US Investable Market Materials 25/50 Index. The ETF has 0.10% in expense ratio, while volume is small at 40,000 shares. Specialty chemicals and industrial gases take the largest share at 25.3% and 20.8%, respectively. The product has a Zacks ETF Rank #2 with a Medium risk outlook (read: Will Materials ETFs Gain Further as Q1 Earnings Unfold?).

Industrials - Zacks Sector Rank 5

The industrials sector is set to benefit as business conditions have improved and demand seems to be solid. About 70% of the industries fall under the top-ranked category. Manufacturing - Material Handling, Wire and Cable Products, Uniform and Related, Metal Products - Procurement and Fabrication, Manufacturing - Thermal Products, Steel - Pipe and Tube are placed in the top 6%.   

Industrial Select Sector SPDR (XLI - Free Report) , with a Zacks ETF Rank #2, looks like an exciting pick. It targets the broad industrial sector and follows the Industrial Select Sector Index. XLI holds 79 stocks in its basket and is well spread out across sectors, with aerospace & defense, machinery, and ground transportation making up for a double-digit share each. Industrial Select Sector SPDR is the most popular ETF with AUM of $18 billion and an average daily volume of around 8.5 million shares. It charges 9 bps in fees per year.

Aerospace - Zacks Sector Rank 7

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 34 stocks in its basket with AUM of $6.3 billion and an expense ratio of 0.40%.

iShares U.S. Aerospace & Defense ETF trades in an average daily volume of around 426,000 shares. It has a Zacks ETF Rank #2 with a Medium risk outlook (read: 5 Sector ETFs to Bet on Q1 Revenue Growth).

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