Threats of inflation, faster-than-expected interest rates, and the possibility of a trade war are playing foul in the U.S. stock market. In fact, Wall Street had a tumultuous ride last month when the major indices dropped to correction territory at one point of time.
Trump’s tariff proposal also spooked markets late last week, sparking threats of a trade war. President Trump announced his plan to impose severe tariffs of 24% on steel imports and 10% on aluminum imports “for a long period of time.” This would result in higher prices for a wide range of products thereby hurting a number of industries and overall economic growth.
While a number of these headwinds have slowed the bulls, 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.
Given uncertainty and strong macro trends, we delved into the Zacks ETF Rank to find the best picks. The system takes into account factors such as industry outlook and expert surveys; and then applies ETF-specific factors (like expense ratios and bid/ask spreads) to spot the best funds in each and every corner of the space.
Using this system, we have picked a handful of ETFs that earned a Zacks ETF Rank #1 (Strong Buy) in the latest rank update that could thus outperform.
In fact, a number of funds in their respective sectors have seen their Ranks surging to the top hierarchy from #3 (Hold) and could make great spring picks.
Hot Sector ETFs Springing Up to Rank #1: SPDR KBW Regional Banking ETF (KRE)
A rising rate scenario is highly profitable for banks as these seek to borrow money at short-term rates and lend at long-term rates thereby resulting in expanding net margins and bolstering banks’ profits. SPDR KBW Regional Banking ETF (NYSEARCA:KRE) targets the banking corner of the financial sector and follows the S&P Regional Banks Select Industry Index.
It holds 117 stocks in its basket with none holding more than 2.59% of assets. KRE is one of the largest and the most popular ETFs in the banking space with AUM of $5.2 billion and average daily volume of around 6.7 million shares. It charges 35 bps a year in fees and has gained 9.1% in the year-to-date time frame.
Hot Sector ETFs Springing Up to Rank #1: First Trust NYSE Arca Biotechnology Index Fund (FBT)
The outlook for the biotech sector has been robust given the wave of mergers and acquisitions, encouraging trends including faster drug approvals and lower regulation, as well as the new tax legislation. Additionally, the sector’s non-cyclical nature is an advantage in the current market turmoil, ruffled by concerns over higher inflation and the resultant increase in interest rates.
That said, First Trust NYSE Arca Biotechnology Index Fund (NYSEARCA:FBT) deserves a special attention and is a beneficiary of this trend. This fund follows the NYSE Arca Biotechnology Index and holds about 30 securities in its basket with none accounting for more than 5.2% of assets.
It has accumulated $1.5 billion in its asset base and trades in a good volume of around 60,000 shares a day. The ETF charges investors 56 bps in fees per year and has surged nearly 12% so far this year.
Hot Sector ETFs Springing Up to Rank #1: Industrial Select Sector SPDR Fund (XLI)
Although the news of Trump’s possible import tariff plan on steel has hurt industrial stocks badly, the sector is expected to see a bump with the infrastructure plan that will lead to higher demand for a wide range of manufacturing products.
Industrial Select Sector SPDR Fund (NYSEARCA:XLI) is the most popular ETF in the industrial space with AUM of $12.1 billion and an average daily volume of around 10.9 million shares.
The fund follows the Industrial Select Sector Index, holding 70 stocks in its basket with each accounting for less than 8.3% of the assets. More than one-fourth of the assets is allocated to aerospace & defense while machinery and industrial conglomerates make up for a double-digit share each. This ETF charges 13 bps in fees per year and has added nearly 1% so far this year.
Hot Sector ETFs Springing Up to Rank #1: Consumer Discretionary Select Sector SPDR Fund (XLY)
Higher rates and rising wages tend to reflect stronger economic conditions, making the consumer discretionary sector tempting to investors. An improving economy coupled with a surging stock market will continue to add wealth effect, resulting in higher consumer confidence.
In order to tap this trend, the ultra-popular Consumer Discretionary Select Sector SPDR Fund (NYSEARCA:XLY), having AUM of $13.2 billion and average daily volume of 5.3 million shares, could be a compelling choice.
It tracks the Consumer Discretionary Select Sector Index and holds 84 securities with higher concentration on the top firm at 21%. Other firms make up for a nice mix with each holding no more than 7.2% of assets. The fund charges 13 bps in fees per year and has gained 6.4% in the year-to-date time frame.
Given that the bullish trend for these sectors will likely continue, investors should definitely look at these ETFs or some other funds in the sector that have recently seen their Zacks Rank surging to the #1 rung.
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