After a bumpy ride in 2018 and a lackluster start to 2019, the Wall Street rebounded strongly following some positive news. In particular, robust December job data and Powell’s comment that the Fed is not in a hurry to raise rates this year instilled optimism into the market amid the second-longest government shutdown (read: Second-Longest Shutdown Puts These ETFs in Focus).
The American economy has added stronger-than-expected 312,000 jobs in December — the biggest gain in 10 months — while unemployment jumped to 3.9%, the highest rate since August.
Signs of progress in U.S.-China trade talks also boosted demand for riskier assets. Additionally, the Fed minutes, which indicated caution on future interest rate hikes, helped to boost sentiment. Notably, the Dow Jones and S&P 500 have been on their longest winning streak since Sep 14 with four consecutive days gain.
Though the news flow is driving stocks higher, slowing global growth, geopolitical tension, uncertainty in trade deal and political instability will continue to weigh on the market. The World Bank slashed global growth forecast by 0.1 percentage points to 2.9% for this year, citing slowing growth in trade and investment and rising interest rates, which sapped momentum especially in emerging markets.
Against such a backdrop, investors could be well served by ETFs and stocks from top-ranked sectors.
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 265 or X-level industries. We rank all 26s 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 feature in the top 50% of all X-level industries, whereas the bottom 133 Zacks Ranked industries are in the bottom 50%.
About 85% of the industries under this sector are top ranked with generic drugs (top 10%), and biomedical and genetics (top 22%) leading the way higher, followed by large-cap pharma (top 24%), HMOs (top 25%), and drugs (top 25%). The dual tailwinds of encouraging industry fundamentals including M&A, and the sector’s defensive tilt has made the sector attractive (read: Best Sector of 2018 and its Hit ETFs & Stocks).
Health Care Select Sector SPDR Fund (XLV - Free Report) : The most popular healthcare ETF, XLV follows the Health Care Select Sector Index. In total, the fund holds 61 securities in its basket, with double-digit concentration on the top firm while others hold no more than 7.6% of the assets. Pharma accounts for 33.4% share from a sector look while healthcare equipment and supplies, healthcare providers and services, and biotech have double-digit exposure each. The product manages nearly $18.3 billion in its asset base and trades in heavy volume of around 10.5 million shares. Expense ratio comes in at 0.13%. XLV has a Zacks ETF Rank #1 with a Medium risk outlook.
Dr. Reddy's Laboratories Ltd (RDY - Free Report) : This Zacks Rank #2 company is an emerging global pharmaceutical company with proven research capabilities. It has seen positive earnings estimate revisions of 20 cents for the fiscal year (ending March 2019) in the past 60 days, and has an expected growth rate of 40.59%. The stock has a VGM Score of A.
The aerospace sector is expected to outperform with all the three industries falling under the top-ranked Zacks industry.
iShares U.S. Aerospace & Defense ETF (ITA - Free Report) : This fund provides investors exposure to the broad aerospace and defense industry by tracking the Dow Jones U.S. Select Aerospace & Defense Index. Holding 36 stocks, the fund is highly concentrated on the top firm at 11.8% while other firms hold no more than 8.04% share each. The fund has AUM of nearly $4.5 billion and charges 43 bps in fees a year. Volume is good at around 303,000 shares. The ETF has a Zacks ETF Rank #2 with a Medium risk outlook.
Lockheed Martin Corporation (LMT - Free Report) : This Zacks Rank #1 company is a global security and aerospace company principally engaged in the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services. The stock has seen positive earnings estimate revision of 5 cents for this year in the past 60 days and is expected to see earnings growth of 11.32%. The stock has a VGM Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
After a terrible performance last year, the technology sector is showing immense strength. Rapid adoption of cloud, Internet of Things, autonomous cars, gaming, wearables, VR headsets, drones, virtual reality devices, artificial intelligence, cryptocurrencies, and other advanced information technologies will fuel huge growth in the space. Additionally, the deployment of 5G (fifth-generation) technology — the next wireless revolution — will likely create further opportunities. As such, more than 80% of the industries under this sector belongs to the top-ranked category. Nanotechnology, optical imaging and photomasks are placed in the top 1%.
iShares U.S. Technology ETF (IYW - Free Report) : This ETF also offers exposure to 151 U.S. electronics, computer software and hardware, and informational technology companies by tracking the Dow Jones US Technology Index. The fund has amassed $3.5 billion in its asset base and charges 43 bps in fees and expenses. Volume is good as it exchanges nearly 224,000 shares in hand a day. More than half of the portfolio is allocated to software and services, while technology hardware and equipment, and media & entertainment account for 21.9% and 21% share, respectively. The fund has a Zacks ETF Rank #1 with a Medium risk outlook (read: FAANGs See a Weak Start to 2019: More Pain Ahead for ETFs?).
Finisar Corporation : This Zacks Rank #2 company is a provider of fiber optic subsystems and network test and monitoring systems, which enable high-speed data communications over local area networks or LANs, storage area networks or SANs, and metropolitan access networks or MANs. It has seen solid earnings estimate revision of 5 cents for fiscal year (ending April 2019) in the past two months with projected earnings growth of 11.63%. The stock has a VGM Score of B.
The retail sector has been gaining from a booming economy backed by robust job growth, wage gains, higher consumer confidence and increase in spending. In particular, Trump’s massive tax cut provides consumers with extra cash leading to higher discretionary spending. As such, computer hardware boast a top industry rank and is expected to outperform, followed by automotive parts retail and wholesale (top3%), automotive retail and wholesale (top 4%), and convenient stores (top 8%) (read: Holiday Sales Strongest in Six Years: ETFs Set to Surge).
SPDR S&P Retail ETF (XRT - Free Report) : This product tracks the S&P Retail Select Industry Index, holding 95 securities in its basket with none accounting for more than 1.32% of the assets. The fund has amassed $503.7 million in its asset base and charges 35 bps in annual fees. Volume is extremely solid, exchanging nearly 7.1 million shares in hand a day on average. The fund has a Zacks ETF Rank #2 with a Medium risk outlook.
AutoZone Inc. (AZO - Free Report) : This Zacks Rank #2 company is the nation's leading retailer and a leading distributor of automotive replacement parts and accessories with stores in the United States, Puerto Rico, Mexico, and Brazil. It has seen solid earnings estimate revision of $1.39 for the fiscal year (ending August 2019) in the past two months, with an expected growth rate of 17.74%. The stock has a VGM Score of A.
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