Back to top

Don't Fear Yield Curve Inversion, Play These Top ETFs Instead

Read MoreHide Full Article

One of most-watched gauges for an impending recession is inversion of yield curve. Investors should note that the spread between the 2-year U.S. Treasury note yield and the 10-year inverted last week, spooking market watchers globally.

In any case, trade tensions have heightened recessionary threats of late. Bridgewater founder Ray Dalio sees a 40% probability of a U.S. recession before the 2020 election. Billionaire “Bond King” and DoubleLine Capital CEO Jeffrey Gundlach said that chances of a recession hitting the U.S. economy by 2020 have risen to 75%.

On average, the S&P 500 has returned 2.5% after a yield-curve inversion in the three months after this, 4.87% in the next six months, 13.48% a year after, 14.73% in the two years after the specific inversion, and 16.41% three years out, according to Dow Jones Market Data, as quoted on MarketWatch.

In addition to this, the MarketWatch article noted that a yield-curve inversion, doesn’t follow an economic recession instantly. Since 1956, past recessions have occured on average around 15 months after an inversion of the 2-year/10-year spread, according to Bank of America Merrill Lynch.

Meanwhile, renewed trade tensions that have created quite a gyration in the market at the start of August, have ebbed a bit. The Office of the U.S. Trade Representative plans to delay 10% tariffs on certain Chinese products, mainly consumer goods that are made in China and sold in the United States, until December (read: Trump Brings Holiday Cheer for Consumer & Tech Stocks & ETFs).

Plus, the U.S. economy has been on a strong footing. The economy grew an annualized 2.1% in the second quarter of 2019, breezing past expectations of 1.8%. Job market has been solid and the inflation outlook perked up in July. Consumer confidence is also near an 18-year high. American consumer confidence bounced back to 135.7 in July, marking the highest level since November 2018. The index is now near an 18-year high of 137.9 set last October (read: US Q2 GDP Growth Slows But Beats Estimates: ETF Areas to Win).

Against this backdrop, investors can definitely play some top-ranked ETFs that could stand to gain in the coming days.

Technology Select Sector SPDR Fund (XLK - Free Report)

The Zacks Rank #1 (Strong Buy) fund includes companies from the following industries: computers & peripherals; software; diversified telecommunication services; communications equipment; semiconductor & semiconductor equipment; internet software & services; IT services; wireless telecommunication services; electronic equipment & instruments; and office electronics. The fund charges 13 bps in fees (read: Top Ranked Tech ETFs in Focus).

Industrial Select Sector SPDR Fund (XLI - Free Report)

The Zacks Rank #1 fund includes companies from the following industries: industrial conglomerates; aerospace & defense; machinery; air freight & logistics; road & rail; commercial services & supplies; electrical equipment; construction & engineering; building products; airlines; and trading companies & distributors. It also charges 13 bps in fees (read: Make the Most of Positive Trade News With These Sector ETFs).

Health Care Select Sector SPDR Fund (XLV - Free Report)

The Zacks Rank #2 (Buy) fund includes companies from the following industries: pharmaceuticals; health care providers & services; health care equipment & supplies; biotechnology; life sciences tools & services; and health care technology. It also charges 13 bps in fees.

VanEck Vectors Retail ETF (RTH - Free Report)

The Zacks Rank #2 fund tracks the overall performance of companies involved in retail distribution, wholesalers, on-line, direct mail and TV retailers, multi-line retailers, specialty retailers and food and other staples retailers. The fund charges 35 bps in fees (read: 5 ETFs to Gain From Walmart Strength Post Q2 Results).

Invesco Aerospace & Defense ETF (PPA - Free Report)

The Zacks Rank #2 fund comprises approximately 50 U.S. companies that are principally engaged in the research, development, manufacture, operation and support of defense, military, homeland security and space operations. The fund charges 60 bps in fees (read: Top ETF Events of 1H Worth Watching in 2H).

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 >>

Published in