The U.S. stock market saw a stupendous bull run over the past few weeks. In fact, both the S&P 500 and Dow Jones Industrial Average are on track to record their best month since March having gained 4.4% and 6%, respectively, so far. The Russell 2000 index also outperformed, surging 12.8% (read: Small Caps Win on Trump Rally: 5 Top ETFs & Stocks).
The uninterrupted rally was triggered off by President-elect Trump’s expansionary and inflationary proposals and was then fueled by a combination of other factors. Some of these include the return of the earnings growth era, the rise in oil price, hopes of another rate hike since last year, moderation of dollar strength, an improving U.S. economy and of course the holiday fervor that raised the appeal for riskier assets.
Against such a backdrop, the spread out exposure to all market caps or a definite tilt toward small caps might lead to outsized gains. Nevertheless, some sectors look incredible under Trump presidency and the current market environment, and investors could easily bet on them.
For these investors, we delved into the Zacks ETF Rank to find the best picks. The system takes into account factors such as industry outlook and expert surveys; and then applies ETF-specific factors (like expense ratios and bid/ask spreads) to spot the best funds in each sector. Using this system, we found a handful of ETFs that have earned a Zacks ETF Rank #1 (Strong Buy) in the latest ratings update, and could thus outperform in the months ahead (see: Our Zacks ETF Rank Guide).
In fact, five sector funds have seen their rank surging to the top hierarchy Zacks Rank #1 (Strong Buy) from 3 (Hold) and could be great picks heading into the Trump era.
SPDR S&P Regional Banking ETF (KRE - Free Report)
Financial stocks have benefited from the dual tailwinds of Trump policy and hopes of interest rate hike in December. Trump seeks to deregulate the industry and dismantle the Dodd-Frank Act, which was enacted in the aftermath of the financial crisis and crimped some of the business lines of the banks. As a result, banks are the major beneficiaries and expected to outperform the other sectors in the coming months.
KRE appears the top pick of this trend, surging nearly 18% this month. This is one of largest and the most popular ETFs in the banking space with AUM of $3.4 billion and tracks the S&P Regional Banks Select Industry Index. Holding 97 securities in its basket, the fund is widely spread out across various components with none holding more than 5%. It charges 35 bps a year in fees (read: Are Regional Bank ETFs Best Positioned to Profit from a Trump Presidency?).
VanEck Vectors Biotech ETF (BBH - Free Report)
The biotech sector, which was under immense pressure this year from Hillary Clinton’s threat of curbing fast-rising prices of specialized drug treatments and increased regulatory scrutiny, bounced back strongly with Trump winning the election. This is because tamer regulations and his proposed reforms would bring the biotech’s charm and profitability back.
In this regard, BBH will likely be the best bet as it saw its rank rising to the top level. This fund offers exposure to 26 large biotechnology corporations by tracking the MVIS US Listed Biotech 25 Index. It is highly concentrated on the top four firms with a double-digit allocation each while other firms hold no more than 6.7%. The fund has amassed $580.7 million in its asset base and charges 35 bps in fees per year. It has gained 8.3% so far this month.
PowerShares DWA Industrials Momentum Portfolio (PRN - Free Report)
The industrial sector got a boost as Trump pledged to bring millions of jobs back to the country, cut taxes, and strictly oppose outsourcing. Given improved industry fundamentals, PRN was upgraded. The fund provides exposure to 47 companies by tracking the Dorsey Wright Industrials Technical Leaders Index.
The product is well balanced across each security with none accounting for more than 3.5% share in the basket. In terms of industrial exposure, machinery, building products, and aerospace and defense make up the top three with nearly 14% share each. The fund has amassed $137.5 million in its asset base and charges 60 bps in annual fees. It has added 8.3% so far this month (read: Manufacturing Reshoring Ahead? ETFs to Profit).
Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report)
As Trump seeks to double the pace of economic growth from the current 2%, create 25 million jobs over 10 years, and cut corporate tax rates to 15% from 35%, it would translate into savings for households, thereby leading to higher spending power. This in turn would result in higher demand for discretionary products. As a result, investors seeking to tap this upcoming trend could find the ultra-popular XLY, having AUM of 10.7 billion, an exciting pick.
This product offers exposure to the broad consumer discretionary space by tracking the Consumer Discretionary Select Sector Index. Holding 88 securities in its basket, it is guilty of concentration on the top firm while other firms make up for a nice mix with each holding less than 7% of assets. Media dominates about one-fourth of the portfolio while specialty retail, Internet retail, and hotels restaurants and leisure round off the next three spots with a double-digit allocation each. The fund charges 0.14% in expense ratio.
First Trust Materials AlphaDEX Fund (FXZ - Free Report)
Trump promised to revive U.S. manufacturing and rehabilitate the country’s aging infrastructure. He has proposed to spend trillion dollars on infrastructure by rebuilding highways, bridges, hospitals and other infrastructure projects over 10 years. Given this, industrial ETFs are expected to get a boost with FXZ being a compelling choice. The product follows the StrataQuant Materials Index, holding 51 stocks in its basket. None of the securities holds more than 3.6% share (read: Tackle Trump & the Fed with These Cyclical Sector ETFs).
Chemicals dominates the portfolio with 39% of assets while containers & packaging, metals & mining and building products round off the next three spots with a double-digit allocation each. The fund has accumulated $241.2 million in its asset base and is up 8.3% this month.
These sector ETFs have been the leaders of the current market rally and the trend is likely to continue under Trump presidency. As such, investors should definitely look at these ETFs or the other funds in the sector that have recently seen their Zacks Rank surging to #1.
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