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Sector Rotation: Investors Flocking to Cyclical ETFs
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Since the U.S. stock market has made a strong comeback from the March lows and activities have started picking up with the reopening of the economy, investors are flocking to cyclical sectors, which are attractively valued at the current levels. These sectors were beaten down badly by the coronavirus-led market sell-off, making their stocks bargain picks.
The cyclical stocks are tied to economic activities and when growth improves, these sectors perform well. The latest bouts of data indicate that economic damage from the coronavirus pandemic was less severe than anticipated. America added 2.5 million jobs in May against the expectation of 7.5 million job losses, while the unemployment rate declined to 13.3% defying forecasts of a near-record 19% rate. Meanwhile, U.S. manufacturing activity rose for the first time last month since January. Stronger-than-expected consumer confidence and homebuilder confidence have led to some optimism.
A booming technology sector, an unprecedented stimulus from the central bank and the government, and hopes of a potential coronavirus vaccine have been the biggest catalysts in driving the stocks higher. A rise in oil price also added to the strength.
Against this backdrop, cyclical sectors like energy, consumer discretionary, materials, industrials and financials are expected to outperform. The same trend has started to materialize in recent weeks. Below we have highlighted some solid ETF picks from these sectors to tap the robust trends.
This ETF offers broad exposure to the energy sector and follows the Energy Select Sector Index, holding 26 stocks in its basket. It is the largest and most-popular ETF in the energy space with AUM of $12.2 billion and average daily volume of 30.2 million shares per day. The product charges 13 bps in annual fees and has a Zacks ETF Rank #3 (Hold) with a High risk outlook. It has gained 20.5% in a month (read: Crude Saw Best Month Ever: Are Energy ETFs Ready to Jump?).
This fund provides exposure to the 25 largest retail firms by tracking the MVIS US Listed Retail 25 Index. It is highly concentrated on the top two firms — Amazon (AMZN - Free Report) at 23.2% and Home Depot (HD - Free Report) at 10.7% — while the other firms hold no more than 8.82% share. The product has amassed $109.6 million in its asset base and charges 35 bps in annual fees. RTH has added 10.2% in a month and carries a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: 5 Sector ETFs Just Got Upgraded to Buy).
This ETF targets the broad materials sector by tracking the Dow Jones U.S. Basic Materials Index and holds 47 stocks in its basket. It has AUM of $292.4 million and charges 42 bps in fees and expenses. Volume is good as it exchanges around 42,000 shares a day. The product is heavily skewed toward specialty chemical and industrial gases with 32% and 27.7% share, respectively, while commodity chemicals round off the top three. IYM has a Zacks ETF Rank #3 with a High risk outlook and has risen 17.5% in a month.
This product provides exposure to 206 industrial stocks by tracking the Dow Jones U.S. Industrials Index. It is tilted toward capital goods’ companies at 49.5% while software services and transportation round off the next two spots, with double-digit exposure each. The fund has an AUM of $804.1 million and average daily volume of around 48,000 shares. It charges 42 bps in annual fees and has gained 19.1% in a month. IYJ has a Zacks ETF Rank #2 with a Medium risk outlook.
This fund offers equal-weight exposure to 89 banking stocks by tracking the S&P Banks Select Industry Index. Regional banks dominate the portfolio with 74.1% share while diversified banks, thrifts & mortgage finance, other diversified financial services, and asset management & custody banks take the remainder. It has amassed $1.7 billion in its asset base while trading in heavy volume of 2.8 million shares a day on average. The product charges 35 bps in annual fees and has a Zacks ETF Rank #2 with a High risk outlook. It has added 34.2% in a month (read: Bank ETFs Gain as Economy Reopens).
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Sector Rotation: Investors Flocking to Cyclical ETFs
Since the U.S. stock market has made a strong comeback from the March lows and activities have started picking up with the reopening of the economy, investors are flocking to cyclical sectors, which are attractively valued at the current levels. These sectors were beaten down badly by the coronavirus-led market sell-off, making their stocks bargain picks.
The cyclical stocks are tied to economic activities and when growth improves, these sectors perform well. The latest bouts of data indicate that economic damage from the coronavirus pandemic was less severe than anticipated. America added 2.5 million jobs in May against the expectation of 7.5 million job losses, while the unemployment rate declined to 13.3% defying forecasts of a near-record 19% rate. Meanwhile, U.S. manufacturing activity rose for the first time last month since January. Stronger-than-expected consumer confidence and homebuilder confidence have led to some optimism.
A booming technology sector, an unprecedented stimulus from the central bank and the government, and hopes of a potential coronavirus vaccine have been the biggest catalysts in driving the stocks higher. A rise in oil price also added to the strength.
Against this backdrop, cyclical sectors like energy, consumer discretionary, materials, industrials and financials are expected to outperform. The same trend has started to materialize in recent weeks. Below we have highlighted some solid ETF picks from these sectors to tap the robust trends.
Energy Select Sector SPDR (XLE - Free Report)
This ETF offers broad exposure to the energy sector and follows the Energy Select Sector Index, holding 26 stocks in its basket. It is the largest and most-popular ETF in the energy space with AUM of $12.2 billion and average daily volume of 30.2 million shares per day. The product charges 13 bps in annual fees and has a Zacks ETF Rank #3 (Hold) with a High risk outlook. It has gained 20.5% in a month (read: Crude Saw Best Month Ever: Are Energy ETFs Ready to Jump?).
VanEck Vectors Retail ETF (RTH - Free Report)
This fund provides exposure to the 25 largest retail firms by tracking the MVIS US Listed Retail 25 Index. It is highly concentrated on the top two firms — Amazon (AMZN - Free Report) at 23.2% and Home Depot (HD - Free Report) at 10.7% — while the other firms hold no more than 8.82% share. The product has amassed $109.6 million in its asset base and charges 35 bps in annual fees. RTH has added 10.2% in a month and carries a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: 5 Sector ETFs Just Got Upgraded to Buy).
iShares U.S. Basic Materials ETF (IYM - Free Report)
This ETF targets the broad materials sector by tracking the Dow Jones U.S. Basic Materials Index and holds 47 stocks in its basket. It has AUM of $292.4 million and charges 42 bps in fees and expenses. Volume is good as it exchanges around 42,000 shares a day. The product is heavily skewed toward specialty chemical and industrial gases with 32% and 27.7% share, respectively, while commodity chemicals round off the top three. IYM has a Zacks ETF Rank #3 with a High risk outlook and has risen 17.5% in a month.
iShares U.S. Industrials ETF (IYJ - Free Report)
This product provides exposure to 206 industrial stocks by tracking the Dow Jones U.S. Industrials Index. It is tilted toward capital goods’ companies at 49.5% while software services and transportation round off the next two spots, with double-digit exposure each. The fund has an AUM of $804.1 million and average daily volume of around 48,000 shares. It charges 42 bps in annual fees and has gained 19.1% in a month. IYJ has a Zacks ETF Rank #2 with a Medium risk outlook.
SPDR S&P Bank ETF (KBE - Free Report)
This fund offers equal-weight exposure to 89 banking stocks by tracking the S&P Banks Select Industry Index. Regional banks dominate the portfolio with 74.1% share while diversified banks, thrifts & mortgage finance, other diversified financial services, and asset management & custody banks take the remainder. It has amassed $1.7 billion in its asset base while trading in heavy volume of 2.8 million shares a day on average. The product charges 35 bps in annual fees and has a Zacks ETF Rank #2 with a High risk outlook. It has added 34.2% in a month (read: Bank ETFs Gain as Economy Reopens).
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Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>