Back to top

Image: Bigstock

Stocks Look Set for a Rally: Top-Ranked ETFs to Buy

Read MoreHide Full Article

After Morgan Stanley, Goldman Sachs has shown faith in market recovery. A team of Goldman Sachs strategists, led by David Kostin, lately said that the worst is over. A “previous near-term downside of 2000 [for the S&P 500] is no longer likely.” Goldman’s year-end S&P 500 target remains at 3000 (+7.3%).

Last week, Morgan Stanley’s chief U.S. equity strategist Mike Wilson also said that the worst is behind investors. Valuations are most attractive since 2011, per Wilson. He added that the current stock market level is a good entry point for a six to 12-month horizon, as quoted on MarketWatch.

Investors should note that the S&P 500 has just seen its best week since 1974. In fact, the Dow is up 25%, the S&P 500 is up about 22% and the Nasdaq is up about 18% from a low hit on Mar 23. Credit goes to the rollout of gigantic Fed and government stimulus, signs of virus containment and the biggest OPEC output-cut deal (read: OPEC Output Deal Cut: Will It Help Oil & Energy ETFs?).

Behind the Headlines

The Fed’s latest easing policy, announced on Apr 9, included the investment of “up to $2.3 trillion in loans to aid small and mid-sized businesses and state and local governments as well as fund the purchases of some types of high-yield bonds, collateralized loan obligations and commercial mortgage-backed securities.” This was on top of the Fed’s zero rate policy in the United States and launch of an infinite QE as well as announcement of the buying of highly-rated corporate debt. On Mar 27, President Trump signed a $2-trillion stimulus package.

Also, there was a drop in new coronavirus cases during the middle of last week. Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, said on Apr 9 that the U.S. death toll from the coronavirus “looks more like 60,000.” That’s pretty lower than the Trump administration’s initial estimates of 100,000 to more than 200,000 deaths. Fauci added that antibody tests for the virus have been developed and will be available “very soon,” as quoted on CNBC.

And finally on Apr 9, OPEC and allies agreed on a tentative deal to cut production by 10 million barrels per day (which equals to a tenth of the global production per day) in May and June, the deepest cut ever agreed by the world's oil producers. Mexico initially did not conform to the OPEC plan, which would mean 400,000 bpd output cut for the country. It instead offered to cut production by 100,000 bpd. The deal also points to the end of the row between Saudi Arabia and Russia.

While things are still uncertain, investors with a strong stomach for risks may bank on the following top-ranked ETFs.  While the earnings season may cause some more selloffs in the coming days, but majority of the downside risk has been priced-in.

Communication Services Select Sector SPDR ETF (XLC - Free Report)

With exponential growth in video and other bandwidth-intensive applications owing to the mass adoption of smartphones and increased deployment of 5G technology, the communication industry is to set to rule irrespective of the pandemic. This is a plus for Zacks Rank #2 (Buy) fund XLC. The fund is heavy on the likes of Facebook, Alphabet, T-Mobile, Comcast and Verizon (read: ETFs to Gain as Disney+ Sees Solid Subscriber Growth).

Homebuilding iShares U.S. Home Construction ETF (ITB - Free Report)

The Zacks Rank #2 fund ITB has suffered a lot owing to a lower-than-expected decline in mortgage rates, likelihood of labor shortage and reduced wealth effect. But historically low mortgage rates and the Fed and government stimulus may result in a comeback for housing ETFs. Construction is among the very few sectors which are likely to record earnings growth in first-quarter 2020, per Earnings Trends issued on Apr 8. The sector is expected to record 4.2% on 2.9% higher revenues.

iShares Core Dividend Growth ETF (DGRO - Free Report)

In the present environment of depressed buyback and dividend activities, stocks that have a history of consistently growing dividends should make quality picks. This makes Zacks Rank #2 DGRO a solid bet.

Utilities Select Sector SPDR ETF (XLU - Free Report)

The first-quarter earnings of the utilities sector are expected to record 1.9% growth. It is a non-cyclical sector and thrives in a low-rate environment, which is currently the case in the United States. The $2-trillion U.S. stimulus package should also boost the sector. Despite a distressing job report for March, employment in utilities rose by about 800 from the previous month. The fund has a Zacks Rank #2.

iShares PHLX Semiconductor ETF (SOXX - Free Report)

The Zacks Rank #1 (Strong Buy) fund should benefit from the rising need for PCs, laptops and other kind of computer peripherals. Solid demand for cloud and robotics will also drive the need for chips. No wonder, the semiconductor space is a hot bet (read: Rising Work-From-Home Trend to Boost 5 Industries & ETFs).

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>>