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Should You Steer Clear of These Sector ETFs for Now?

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Trade, Fed and oil have so far determined the movement of global markets this year and will make or break it in the days ahead as well. Some say that trade war fear among the United States and its major trading partners as well as faster Fed rate hike worries are baked in at the current level.

While the Fed move seems to have been priced in, we cannot say anything for certain about trade. Retaliations from China may worsen the situation. And if global superpowers decide to go soft on that agenda, they can probably save the global economy from a slow down.

Against this backdrop, we highlight a few sector ETFs have a sell rating at Zacks. Let’s dig a little deeper.

Transportation

SPDR S&P Transportation ETF(XTN - Free Report) – #4 (Sell) from #3 (Hold)

The broader transportation sector is set to lose from a crude. This is especially true as energy costs form a major portion of overall costs of this sector. Lower-than-expected crude inventory built, U.S. sanctions on Iran and Venezuela and the ongoing OPEC output cut boosted oil prices significantly this year.

Though the OPEC decided to boost output in June to make up for the shortfall in the oil patch, the quota agreed on was smaller than expected. Overall, WTI crude ETF United States Oil (USO - Free Report) was up 12.9% in the past month (as of Jul 3, 2018), while XTN shed about 2.3% (read: Winning and Losing Sectors ETFs Post OPEC Decision).

Airlines

US Global Jets ETF (JETS - Free Report) – #4 from #2 (Buy)

The airlines ETF has been flying low, having lost about 4.9% in the past month (as of Jul 3, 2018). Oil prices play a crucial role in the airlines’ cost structure. Since crude prices have been steady, airlines are expected to take a hit.   

The International Air Transport Association (IATA) indicated in June that the industry is expected to register $33.8 billion in profits this year, down 12% from the prior forecast of $38.4 billion. Other factors that led to the guidance cut were increasing interest rates and a spike in geopolitical tensions (read: Will the Airline ETF Crash on Oil Price Jump?).

Per IATA, profit forecast for 2018 will likely be 4.1% of about $750-billion sales. Since 4% is not a compelling margin, IATA believes that the industry is in a delicate condition. Moreover, the ongoing trade tensions are another cause of concern as these could result in a drop in the passenger count or air cargo.

Utility

Invesco S&P 500 Equal Weight Utility ETF(RYU - Free Report) – #5 (Strong Sell) from #5

The fund may have gained 5.7% in the past month as investors shifted to this safe-haven sector amid escalating trade war fears, the fundamentals do not bode well for the sector. This is because the Fed has been turning more hawkish lately and projects a total of four rate hikes this year against three estimated earlier. This resulted in a rising rate environment in the United States.

Since the utility sector underperforms in a rising rate environment due to its heavy debt requirement, the fund may slide in the coming days. Moreover, the sector is high-yielding in nature, but high dividend-paying stocks normally lose luster if benchmark treasury yields start inching northward.

Consumer Staples

Invesco S&P Small-Cap Consumer Staples ETF (PSCC - Free Report) – #4 from #3

This segment might be on a tear due to its defensive nature amid trade tensions but consumer staples normally underperforms in a rising rate environment. Moreover, this small-cap fund gained about 15.8% in the past three months compared with 5.1% rise of the S&P 500 index and the biggest staples fund XLP (down 0.7% in the past three months).

If the impact of trade spat is priced in at the current level, we do not see much room for consumer staples growth.  And investors may decide to book profits in PSCC after such a stellar run.

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