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2 Sectors & Their ETFs Are Hot Picks for 2020

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As we are nearing the end of 2019, strategists are coming up with forecasts for the New Year. Of the brokerages tracked by CNBC that have published sector-by-sector forecasts for 2020, two sectors have emerged as hot favorites. Both are deemed to offer good value proposition — an investing style which is likely to dominate 2020.

“Given the longer-term outperformance cycles of value relative to growth, we believe the market may soon be entering the very early stages of a ‘value cycle,’” per BMO’s Brian Belski, as quoted on CNBC. This is especially true given the 24.3% year-to-date gain of SPDR S&P 500 ETF Trust (SPY - Free Report) .

In fact, three key U.S. indexes have hit all-time highs several times this year, thanks to high-flying growth stocks. As a result, most strategists are of the opinion that the market is due for a trend reversal next year.

Against this backdrop, we highlight two sectors and their related ETFs that could be great picks in 2020.


Most strategists are overweight on the financial sector as the largest portion of traditional value indexes is held by financial stocks. Plus, minimal credit risk and strong shareholder yield add to the positives, according to Bank of America’s Savita Subramanian. High quality and the cash return offered by the sector are largely being unnoticed, per Subramanian.

Investors should note that bank stocks are often known for their dividend payouts. Historical dividend growth of The Banks - Major Regional industry is 12.25% versus 4.84% of the S&P 500 ETF iShares Core S&P 500 ETF (IVV - Free Report) . Dividend yield of the space is 2.84% compared with 1.83% of the S&P 500.

Per morningstar, many bank stocks offer dividend payout ratios in the range of 30% to 40%. Analysts consider “current dividends and payout structures as stable” and believe that dividend payouts should not come under pressure in any occasion of economic slowdown (read: Why Bank ETFs May Soar in 2020).

Financial Select Sector SPDR Fund (XLF - Free Report) , First Trust Financials AlphaDEX Fund (FXO - Free Report) and Vanguard Financials ETF (VFH - Free Report) have a Zacks Rank #2 (Buy).

Consumer Discretionary

Per a BMO strategist, “Consumer Discretionary, far and away, has the highest estimated long-term EPS growth expectations among S&P 500 sectors.” The consumer discretionary market has an estimated 3-5 year EPS growth rate of 11.4% versus 9.7% of the S&P 500.

Consumer discretionary has 12.1% expected revenue growth rate for the third quarter – the highest among the 16 Zacks-categorized S&P 500 sectors. Earnings growth is expected to be 2.9% for the third quarter against 1.2% expected earnings recession for the S&P 500.

Some of the top-ranked Zacks industries in the sector are Leisure and Recreation Products, Consumer Services, Shoes and Retail Apparel, Cable Television, Furniture and Toys - Games – Hobbies.

Forward P/E ratio of the S&P 500 is now about 20.1x while the consumer discretionary market has it at 21.8x. The slightly higher forward P/E of the sector calls for a decent valuation.

Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report) , Vanguard Consumer Discretionary ETF (VCR - Free Report) , John Hancock Multifactor Consumer Discretionary ETF and First Trust Consumer Discretionary AlphaDEX Fund (FXD - Free Report) also have a Zacks Rank #2.

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