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4 Sector ETFs in Focus as US Economy Appears in Late Cycle

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The current U.S. economic expansion is the longest in history. U.S. economic expansion stepped into its 11th year on Jul 1, breezing past the previous record of 120 months from March 1991 to March 2001, according to the National Bureau of Economic Research (read: ETF & Stock Winners of Longest US Economic Expansion).

However, the record-breaking expansion, which is now the longest in history, has also been one of the slowest. Starting in June 2009, this record-setting run witnessed GDP growing cumulatively by 25%, far slower than previous expansions. Does this indicate that we are in the late business cycle phase?

What is Late Cycle Phase?

Per Fidelity, “the late-cycle phase has had an average duration of roughly a year and a half, and overall stock market performance has averaged 6% on an annualized basis.” Fidelity went on to characterize the late cycle phase as a time period when growth slows, credit tightens, earnings weaken, policy contracts and so on.

Though the Fed slashed its key rates in July by 25 bps, investors should note that the U.S. central bank has enacted nine rate hikes since December 2015. This clearly entails that the core essence of the Fed policy is contractionary.

Not only this, the corporate earnings picture is also bleak. Wall Street analysts are slashing third-quarter profit estimates, mainly to reflect concerns related to trade dispute.

However, the momentum is cooling down. Job growth has been relatively weaker than in “other postwar recoveries,” per CNBC. There has lately been a lag in the housing market. The bond market has flashed recessionary signals several times in between.

Against this backdrop, sectors that are non-cyclical in nature are likely to be in fashion.

Consumer StaplesConsumer Staples Select Sector SPDR Fund (XLP - Free Report)

The underlying Consumer Staples Select Sector Index seeks to provide an effective representation of the consumer staples sector of the S&P 500 Index. The fund puts 26% weight on beverages, followed by 25.7% weight in household products, 19% in food & staples retailing, and 17.5% in food products. It charges 13 bps in fees (read: 5 ETFs to Gain From Walmart Strength Post Q2 Results).

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

The underlying Health Care Select Sector Index includes companies from the following industries: pharmaceuticals; health care providers & services; health care equipment & supplies; biotechnology; life sciences tools & services; and health care technology. This fund also charges 13 bps in fees (read: Don't Fear Yield Curve Inversion, Play These Top ETFs Instead).

Utilities – Utilities Select Sector SPDR Fund (XLU - Free Report)

The underlying Utilities Select Sector Index seeks to provide an effective representation of the Utilities sector of the S&P 500 Index. The fund charges 13 bps in fees. Electric utilities (60.9%), multi-utilities (32.6%) and water utilities (2.7%) are the top three segments of the fund. 

Energy – iShares U.S. Energy ETF (IYE - Free Report)

Though the energy sector is struggling right now due to lower oil prices caused by global slowdown worries, Fidelity notified that the “energy sector has seen the most convincing patterns of outperformance in the late cycle.”

Integrated Oil & Gas services account for about half of the portfolio, followed by 21% focus on Oil & Gas Exploration & Production, 10% exposure to Oil & Gas Storage & Transportation and 10.1% investment in Oil & Gas Refining & Marketing & Transportation. So, investors can keep a tab on this sector ETF too (read: Energy ETFs Look Weak Ahead of Key Q2 Earnings Releases).

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