Wall Street has staged a strong comeback since late March, leaving the rest of the world behind. A booming technology sector as well as an unprecedented stimulus from the central bank and the government has been the primary reason for outperformance.
Additionally, hopes surrounding a potential coronavirus vaccine and reopening of the economy instilled confidence. All the 50 states have lifted restrictions put in place to combat the coronavirus outbreak. The latest bouts of data indicate that economic damage from the coronavirus pandemic was less severe than anticipated. U.S. manufacturing activity rose for the first time since January while jobless claims fell for the first time during the pandemic in the week ended May 23. Readings on durable goods also beat forecasts. Stronger-than-expected consumer confidence and homebuilder confidence have led to some optimism.
Notably, the S&P 500 has risen about 36% from its March low, cutting its losses for the year to 5.8%. The index also capped its best two-month gain since 2009. The bullish trend will likely continue even though the recent escalation in U.S.-China trade tensions could weigh (read: 5 ETFs Up More Than 20% in Three Months).
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 265 X-level industries on the basis of 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%.
Most of the industries under this sector are top ranked with nursing homes (top 2%) leading the way followed by large-cap pharma (top 6%), generic drugs (top 7%), biomedical and genetics (top 9%), and drugs (top 12%). The sector is currently benefiting from the COVID-19 pandemic that has kept biotech and pharma players all over the world on their toes for a vaccine or a treatment (read: Biotech ETFs Soaring on COVID-19 Vaccine Progress).
iShares Nasdaq Biotechnology ETF (IBB - Free Report) : This ETF has upgraded by a notch to Zacks Rank #1 (Strong Buy) in the latest rating update. It provides exposure to 209 U.S. biotechnology and pharmaceutical companies by tracking the Nasdaq Biotechnology Index. It is the most-popular fund in the biotech space with AUM of $8.8 billion and average daily volume of 3.4 million shares. IBB charges 47 bps in annual fees.
The Ensign Group Inc. (ENSG - Free Report) : This Zacks Rank #2 (Buy) player provides health care services in the post-acute care continuum, urgent care center and mobile ancillary businesses in the United States. It saw no earnings estimate revisions for this year in the past 30 days and has an expected growth rate 13.8%. The stock has a VGM Score of B. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The energy sector is poised for a strong rebound driven by an astounding rally in oil price after the historic collapse in April. Demand is improving and supply glut is shrinking. This is especially true given the potential production cuts by major oil producers and the potential for further cuts. In addition, an uptick in demand due to the lifting of COVID-19 restrictions also drove the oil price higher. Though almost all industries in the sector currently possess a top rank, biofuels (top 2%), production and pipelines (top 12%), exploration and production (top 12%) and oil and gas drilling (top 13%) lead the way higher.
Energy Select Sector SPDR (XLE - Free Report) : This ETF has also been upgraded by a notch to Zacks Rank #3 (Hold) in the latest rating update. It follows the Energy Select Sector Index, holding 26 stocks in its basket. XLE is the largest and most-popular ETF in the energy space with AUM of $11.2 billion and average daily volume of 29.2 million shares per day. It charges 13 bps in annual fees (read: 5 Energy ETFs Look Solid on Rank Upgrade, Oil Price Rise).
Enbridge Inc (ENB - Free Report) : This is a leading energy infrastructure company in Canada and the United States with a Zacks Rank #2. The stock saw positive earnings estimate revisions of 17 cents for this year in the past 30 days. Its earnings are expected to decline 6% this year. Enbridge has a VGM Score of B.
About 88% of the industries from the sector belongs to a top Zacks Industry Rank. Wireline national and regional rural wireless are the top industries followed by gas distribution (top 13%) and electric power (top 29%). Volatility and Fed rate cuts to near zero are providing enough boost to the utilities sector.
Utilities Select Sector SPDR (XLU - Free Report) : With AUM of $11.7 billion, this fund provides exposure to a small basket of 28 securities by tracking the Utilities Select Sector Index. It is primarily concentrated on the top firm with 15% share while other firms hold not more than 8.5% of the assets. Electric utilities takes the top spot in terms of sectors at 63.1%, closely followed by multi utilities (31.5%). The product charges 13 bps in annual fees and sees a massive volume of around 20.1 million shares on average. It has a Zacks ETF Rank #3 (read: How Will Utility ETFs React to Mixed Q1 Earnings?).
Telephone and Data Systems Inc. (TDS): This Zacks Rank #2 company is a diversified telecom service provider offering wireless and wireline services in 36 states. It witnessed negative earnings estimate revision of a penny for this year in a month and has projected an earnings growth rate of 44.7%. The stock has a VGM Score of A.
The COVID-19 pandemic has driven the e-commerce boom and changed the consumer landscape to a purely digital one. Staying indoors has propelled the demand for cloud computing, gaming, e-sports and streaming services. Additionally, investors have largely piled into software shares which are apparently more insulated from the impacts of the virus. Semiconductor - circuit foundry, communication infrastructure, computer optical imaging, semiconductor memory and fiber optics are the top industries (read: Tech Sector Outperforming This Year: Best ETFs, Stocks).
iShares U.S. Technology ETF (IYW - Free Report) : This ETF offers exposure to 158 U.S. electronics, computer software and hardware, and informational technology companies. It tracks the Dow Jones U.S. Technology Capped Index. The fund has AUM of $5.3 billion and charges 42 bps in fees and expenses. Volume is good as it exchanges nearly 183,000 shares a day. The fund has a Zacks ETF Rank #1 with a Medium risk outlook.
Taiwan Semiconductor Manufacturing Company Ltd. (TSM - Free Report) : This Zacks Rank #1 company is the world's largest dedicated integrated circuit foundry. It saw positive earnings estimate revision of a penny for this year in the past month and has an estimated growth rate of 30.2%. The stock has a VGM Score of B.
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 >>