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After a May swoon, Wall Street has staged a nice comeback this month on hopes of a monetary easing policy. This is especially true as the Fed hinted at rate cuts, if needed, given the implications of trade war on the economy. Additionally, the rally came after President Donald Trump suspended the planned tariffs against Mexico. A slew of mergers and acquisitions is also driving the stocks higher this month (read: 5 ETFs That More Than Doubled S&P 500 This Year).
However, escalation in the U.S.-China trade spat, geopolitical tension and global growth concerns continue to weigh on stocks. The World Bank, early this month, slashed its global growth outlook from 2.9% projected in January to 2.6% — the slowest growth in three years — citing trade conflicts, financial strains and unexpectedly sharp slowdowns in wealthier countries.
Additionally, the bond market is signaling a recession with the inversion of the yield curve, in which short-term interest rates are higher than the long-term ones. All these data indicate a softening economy.
Against such a backdrop, investors could be well served by ETFs and stocks from sectors that house top-ranked industries.
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%.
Aerospace
The aerospace sector is expected to outperform with two of the three industries under it falling under a 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 34 stocks, the fund is highly concentrated on the top two firms at 18.3% and 16.4%, respectively, while other firms hold no more than 6.9% share each. The fund has AUM of nearly $4.9 billion and charges 43 bps in fees a year. Volume is good at around 250,000 shares. The ETF has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: Raytheon, United Tech to Merge: Aerospace ETFs in Focus).
Lockheed Martin Corporation (LMT - Free Report) : This Zacks Rank #2 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 solid earnings estimate revision of 12 cents for this year in the past 30 days and is expected to see earnings growth of 16.71%. The stock has a VGM Score of B.
Medical
About 85% of the industries under this sector are top ranked with nursing homes (top 3%), and HMOs (top 7%) leading the way higher, followed by large-cap pharma (top 24%), dental supplies (top 24%) and biomedical and genetics (top 27%). The dual tailwinds of encouraging industry fundamentals including M&A, and the sector’s defensive tilt has made the sector attractive.
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 62 securities in its basket, with double-digit concentration on the top firm, while others hold no more than 7% of the assets. Pharma accounts for 32.5% 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 $18.4 billion in its asset base and trades in heavy volume of around 12.5 million shares. Expense ratio comes in at 0.13%. XLV has a Zacks ETF Rank #2 with a Medium risk outlook (read: Best ETF Ideas for the Second Half of 2019).
WellCare Health Plans Inc. : This Zacks Rank #2 company is focused exclusively on providing government-sponsored managed care services, primarily through Medicaid, Medicare Advantage and Medicare Prescription Drug Plans, to families, children, seniors and individuals with complex medical needs. It has seen positive earnings estimate revisions of 4 cents for this year in the past 30 days, and has an expected growth rate of 26.93%. The stock has a VGM Score of A.
Construction
The U.S. construction market has been buoyant on lower mortgage rates and decelerating home price growth that has encouraged people to buy more homes. About 70% of the industries from this sector are top ranked with concrete and aggregates (top 13%) leading the way higher followed by heavy construction (top 16%), homebuilders (top 20%) and lighting (top 20%).
iShares U.S. Home Construction ETF (ITB - Free Report) : This fund provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index. With AUM of $1.2 billion, it holds a basket of 46 stocks with heavy concentration on the top three firms. The product charges 43 bps in annual fees and trades in heavy volume of around 2.6 million shares a day on average. It has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: Best and Worst ETFs Halfway Through Q2).
Quanex Building Products Corporation (NX - Free Report) : This Zacks Rank #1 (Strong Buy) company is an industry-leading manufacturer of components sold to Original Equipment Manufacturers in building products industry. It has seen solid earnings estimate revision of 9 cents for the fiscal year (ending October 2019) in the past month, with an expected growth rate of 30.8%. The stock has a VGM Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
Energy
More than 52% of the industries from the sector belong to a top Zacks Industry Rank with exploration and production, integrated and production pipeline leading the way higher. The outlook for energy sector seems unsteady given the tight supply conditions and waning demand.
SPDR S&P Oil & Gas Exploration & Production ETF (XOP - Free Report) : This fund provides exposure to oil and gas exploration companies by tracking the S&P Oil & Gas Exploration & Production Select Industry Index. It holds 64 securities in its basket, with none making up for more than 3.9% share. The product has amassed $1.6 billion and charges 35 bps in annual fees. It trades in average daily volume of around 22 million shares and has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: Pain or Gain Ahead for Oil & Energy ETFs?).
Pioneer Natural Resources Company (PXD - Free Report) : This Zacks Rank #2 company is a large, independent exploration and production company that is focused on helping to meet the world's energy needs. It has seen solid earnings estimate revision of 8 cents for this year in a month with projected earnings growth of 48.8%. The stock has a VGM Score of A.
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ETFs & Stocks From Top-Ranked Sector to Buy
After a May swoon, Wall Street has staged a nice comeback this month on hopes of a monetary easing policy. This is especially true as the Fed hinted at rate cuts, if needed, given the implications of trade war on the economy. Additionally, the rally came after President Donald Trump suspended the planned tariffs against Mexico. A slew of mergers and acquisitions is also driving the stocks higher this month (read: 5 ETFs That More Than Doubled S&P 500 This Year).
However, escalation in the U.S.-China trade spat, geopolitical tension and global growth concerns continue to weigh on stocks. The World Bank, early this month, slashed its global growth outlook from 2.9% projected in January to 2.6% — the slowest growth in three years — citing trade conflicts, financial strains and unexpectedly sharp slowdowns in wealthier countries.
Additionally, the bond market is signaling a recession with the inversion of the yield curve, in which short-term interest rates are higher than the long-term ones. All these data indicate a softening economy.
Against such a backdrop, investors could be well served by ETFs and stocks from sectors that house top-ranked industries.
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%.
Aerospace
The aerospace sector is expected to outperform with two of the three industries under it falling under a 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 34 stocks, the fund is highly concentrated on the top two firms at 18.3% and 16.4%, respectively, while other firms hold no more than 6.9% share each. The fund has AUM of nearly $4.9 billion and charges 43 bps in fees a year. Volume is good at around 250,000 shares. The ETF has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: Raytheon, United Tech to Merge: Aerospace ETFs in Focus).
Lockheed Martin Corporation (LMT - Free Report) : This Zacks Rank #2 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 solid earnings estimate revision of 12 cents for this year in the past 30 days and is expected to see earnings growth of 16.71%. The stock has a VGM Score of B.
Medical
About 85% of the industries under this sector are top ranked with nursing homes (top 3%), and HMOs (top 7%) leading the way higher, followed by large-cap pharma (top 24%), dental supplies (top 24%) and biomedical and genetics (top 27%). The dual tailwinds of encouraging industry fundamentals including M&A, and the sector’s defensive tilt has made the sector attractive.
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 62 securities in its basket, with double-digit concentration on the top firm, while others hold no more than 7% of the assets. Pharma accounts for 32.5% 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 $18.4 billion in its asset base and trades in heavy volume of around 12.5 million shares. Expense ratio comes in at 0.13%. XLV has a Zacks ETF Rank #2 with a Medium risk outlook (read: Best ETF Ideas for the Second Half of 2019).
WellCare Health Plans Inc. : This Zacks Rank #2 company is focused exclusively on providing government-sponsored managed care services, primarily through Medicaid, Medicare Advantage and Medicare Prescription Drug Plans, to families, children, seniors and individuals with complex medical needs. It has seen positive earnings estimate revisions of 4 cents for this year in the past 30 days, and has an expected growth rate of 26.93%. The stock has a VGM Score of A.
Construction
The U.S. construction market has been buoyant on lower mortgage rates and decelerating home price growth that has encouraged people to buy more homes. About 70% of the industries from this sector are top ranked with concrete and aggregates (top 13%) leading the way higher followed by heavy construction (top 16%), homebuilders (top 20%) and lighting (top 20%).
iShares U.S. Home Construction ETF (ITB - Free Report) : This fund provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index. With AUM of $1.2 billion, it holds a basket of 46 stocks with heavy concentration on the top three firms. The product charges 43 bps in annual fees and trades in heavy volume of around 2.6 million shares a day on average. It has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: Best and Worst ETFs Halfway Through Q2).
Quanex Building Products Corporation (NX - Free Report) : This Zacks Rank #1 (Strong Buy) company is an industry-leading manufacturer of components sold to Original Equipment Manufacturers in building products industry. It has seen solid earnings estimate revision of 9 cents for the fiscal year (ending October 2019) in the past month, with an expected growth rate of 30.8%. The stock has a VGM Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
Energy
More than 52% of the industries from the sector belong to a top Zacks Industry Rank with exploration and production, integrated and production pipeline leading the way higher. The outlook for energy sector seems unsteady given the tight supply conditions and waning demand.
SPDR S&P Oil & Gas Exploration & Production ETF (XOP - Free Report) : This fund provides exposure to oil and gas exploration companies by tracking the S&P Oil & Gas Exploration & Production Select Industry Index. It holds 64 securities in its basket, with none making up for more than 3.9% share. The product has amassed $1.6 billion and charges 35 bps in annual fees. It trades in average daily volume of around 22 million shares and has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: Pain or Gain Ahead for Oil & Energy ETFs?).
Pioneer Natural Resources Company (PXD - Free Report) : This Zacks Rank #2 company is a large, independent exploration and production company that is focused on helping to meet the world's energy needs. It has seen solid earnings estimate revision of 8 cents for this year in a month with projected earnings growth of 48.8%. The stock has a VGM Score of A.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>