Although inflation fears and the resultant faster-than-expected rates hike have been playing foul in the stock market, the long-term fundamentals remain intact given solid corporate earnings and accelerating global economic growth.
The euphoria surrounding the tax reform has been the biggest catalyst this year, as it will perk up the economy and save billions for corporations, leading to reflation trade and an earnings boost. Further, increased consumer spending, rising consumer confidence, 17-year low unemployment, and a pickup in average hourly earnings are bolstering confidence in the economy and the nine-year bull market.
However, volatility will continue to block the bulls going ahead this year given stretched valuations, geopolitical tension, and Washington turmoil. Additionally, higher rates will lead to a rise in borrowing costs, thereby hurting economic growth.
Against such a backdrop, investors could be well served by looking at the ETFs and stocks of the top-ranked sectors.
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.
The Zacks Industry classification divides the business world into 16 sectors comprising 60 medium or M-level industries and 260 plus or X-level industries. We rank all 260 plus X-level industries based on the 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 would be in the top 50% of all X-level industries, whereas the bottom 133 Zacks Ranked industries would be in the bottom 50%.
Top-Ranked Sector ETFs & Stocks From Top Industries: Construction
About 80% of the industries under this sector are top-ranked with homebuilders (top 5%) and wood (top 9%) leading the way higher, followed by miscellaneous (top 12%), paints and related products (top 14%), and concrete and aggregates (top 20%).
While tight supply, rising prices, and higher mortgage rates might lose appeal for the homebuilding segment, solid labor market fundamentals along with rising wages will continue to fuel growth. Builders are also optimistic about the outlook, suggesting that strong demand for homes in the months ahead.
SPDR S&P Homebuilders ETF (NYSEARCA:XHB): The most popular choice in the homebuilding space, XHB, follows the S&P Homebuilders Select Industry Index. In total, the fund holds about 34 securities in its basket with each accounting for less than 5.41% share.
It has amassed $955.8 million in its asset base and trades in heavy volume of around 1.8 million shares. The product charges 35 bps in fees per year and has a Zacks ETF Rank #2 (Buy) with a High risk outlook.
Toll Brothers Inc (NYSE:TOL): This Zacks Rank #1 company builds an array of luxury residential single-family detached, attached home, master planned resort-style golf, and urban low-, mid-, and high-rise communities.
It saw positive earnings estimate revisions by 24 cents for this fiscal year in the past 30 days, and has an expected growth rate of 28.71%. The stock has a VGM Score of A.
Top-Ranked Sector ETFs & Stocks From Top Industries: Retail
The retail sector is flourishing this year thanks to a massive $1.5-trillion tax cut, which will provide consumers with extra cash that will lead to higher discretionary spending. Additionally, retailers, especially departmental stores are the biggest beneficiaries of the tax cut plan as they pay maximum taxes among S&P 500 companies given their large domestic networks.
As such, automotive retailer and regional departmental stores boast a top industry rank and are expected to outperform, followed by consumer electronic (top 2%), miscellaneous (top 5%) and discount stores (top 9%).
PowerShares Dynamic Retail Portfolio (NYSEARCA:PMR): This fund follows the Dynamic Retail Intellidex Index, which measures the performance of companies engaged in operating general merchandise stores such as department stores, discount stores, warehouse clubs and superstores; specialty stores, including apparel, electronics, accessories and footwear stores; and home improvement and home furnishings stores.
In total, the product holds 30 securities with none accounting for more than 6.01% of assets. PMR is the unpopular and illiquid option in the retail space having AUM of just $11.2 million and average trading volume of 2,000 shares. It charges 63 bps in fees per year and carries a Zacks ETF Rank #2 with a Medium risk outlook.
Burlington Stores Inc (NYSE:BURL): This Zacks Rank #2 company operates as a retailer of branded apparel products in the United States, offering fashion-focused merchandise, including ladies sportswear, menswear, youth apparel, baby furniture, footwear, accessories, home décor and gifts, and coats.
It saw positive earnings estimate revision of four cents for this fiscal year in the past one month, with an expected growth rate of 19.83%. The stock has a VGM Score of B.
Top-Ranked Sector ETFs & Stocks From Top Industries: Industrials
The industrial product sector is expected to see a bump with Trump’s infrastructure plan that will lead to higher demand for wide range of manufacturing products. Additionally, 65% of the industries fall under the top-ranked category. Office supplies, manufacturing – electrical utilities, and manufacturing – construction and mining are placed in the top 2%.
First Trust Industrials/Producer Durables AlphaDEX Fund (NYSEARCA:FXR): This fund follows the StrataQuant Industrials Index, which uses the AlphaDEX methodology to select stocks from the Russell 1000 Index and ranks them on both growth and value factors. The approach results in a basket of 94 securities with each holding less than 2% share.
Machinery, airlines and aerospace & defense are the top three industries with double-digit exposure each. The fund has accumulated nearly $1.7 billion in AUM and sees a good trading volume of about 144,000 shares a day. It charges 63 bps in fees per year and has a Zacks ETF Rank #2 with a Medium risk outlook.
Acco Brands Corporation (NYSE:ACCO): This Zacks Rank #2 company is a world leader in branded office products with industry-leading brands including Swingline, Kensington, Wilson Jones, Quartet, GBC, and Day-Timer. It saw solid earnings estimate revision of 11 cents for this year in the past one month and is expected to see growth of 13.45%. The stock has a VGM Score of A.
Top-Ranked Sector ETFs & Stocks From Top Industries: Aerospace
The aerospace sector is the best performing sector so far this year. The outperformance is likely to continue with top-ranked defense (top 25%) and defense equipment (top 36%) industries. A boost in military spending in Trump budget proposal and rising geopolitical risks bodes well for the sector.
iShares U.S. Aerospace & Defense ETF (BATS:ITA): This fund provides investors exposure to the broad aerospace and defense industry by tracking the Dow Jones U.S. Select Aerospace & Defense Index. Holding 38 stocks, the fund is highly concentrated on the top firm, Boeing (BA), at 12.2% while other firms no more less than 8% share each.
The fund has AUM of nearly $6 billion while charging 44 bps in fees a year. Volume is good at around 311,000 shares. The ETF has a Zacks ETF Rank #2 with a Medium risk outlook.
Huntington Ingalls Industries Inc (NYSE:HII): This Zacks Rank #1 company is engaged in designing, building, overhauling, and repairing ships primarily for the U.S. Navy and the U.S. Coast Guard, and provides after-market services for military ships around the globe.
The stock saw whopping earnings estimate revision of $4.94 for this year in the past 30 days and is expected to see earnings growth of 43.16%. The stock has a VGM Score of B.
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