So far this year, the stock market hasn’t been much to celebrate. The S&P 500 Index has barely edged up in price by 2.05%. And after the initial euphoria of the Tax Cuts and Jobs Act of 2017 (TCJA) wore off, the index has remained range-bound.
But this doesn’t mean that you need to settle for lukewarm results this summer. Instead, there are some specific market sectors that offer better performances for a much more sizzling return for this summer and into the fall.
Petrol Power
I’ll start with petroleum. The price of crude is up after a sustained drop in inventories around the world and a continued build-up in demand. This has affected both global oil prices as tracked by Brent crude price and West Texas Intermediate (WTI) for U.S. crude.
This price movement is now further supported after the regular meeting of OPEC in Vienna in June. OPEC agreed to a much smaller amount of additional output. And with U.S. sanctions resuming against Iran, effectively cutting off much of that nation’s crude from global supplies, and Venezuela continuing to fester — supply and demand conditions will support strong prices.
And even with discussions of another boost in production by Saudi Arabia this week, the Saudis have limited additional lift capacity given their current field production conditions.
This means more revenues from upstream producers through the midstream pipelines and downstream to the refiners.
And the market for these companies, while starting to rally, is still well below the strong upward movement in the oil market as tracked by the S&P Energy Select Sector Total Return Index, which is up 5.2% year to date.
That index tracks the total return of stocks from both upstream and downstream parts of the oil market. And while we’ve begun to see the improvement, we’re still well below the performance of the index over the past five years.
The best ETF to cash in on this segment is the Energy Select SPDR ETF (NYSE:XLE). Its expenses are 0.13%, or $13 per $10,000 invested annually. This provides exposure to the same companies inside the index. It is already turning in a return so far this year of just shy of 5%, and with more investment in the U.S. and global oil fields, this ETF should continue to out-sizzle the general S&P 500.
Bank on Banks
Then let’s move to the banks. With U.S. business investment on the rise and set to continue, lenders are benefiting.
There are two major groups that are in this sector. The first is the regional banks. These are benefiting not just from loan demand, but also regulatory reforms coming out of Capitol Hill as well as the Federal Reserve and its regulatory affiliates.
Capital requirements and compliance costs are both easing. This will result in better bank company performance and improved margins. Add in the normalizing of shorter-term interest rates, and banks are beginning to have room to better price loans. This will mean improved interest margins.
The second group benefiting is the Business Development Companies (BDCs). These are investment companies that are run like funds. They make loans and participate in businesses’ equity values. The result is that they receive regular cash flows from loans while also generating gains over time with the success of their business investments.
They stepped into the void of banks that have had challenges participating in lending, particularly in the small- to middle-market company sector. But even as banks come back into this market, the overall demand for funding makes for an expanding market that will benefit both groups, as shown from their recent progress over the past year.
There are two ETFs that are set to provide exposure to the regional banks and the BDCs. The best bank ETF is the SPDR S&P Regional Banking ETF (NYSE:KRE), with an expense ratio of 0.35%. This provides exposure to the best of the U.S. regional banks that will benefit from the improving economy as well as regulatory reforms.
Then on the alternative finance front, there is the VanEck Vectors BDC Income ETF (NYSE:BIZD). This provides exposure to the U.S. BDC market while also generating a very hot dividend yield of 8.5%, but be cautious, as it carries a high expense ratio.
Utility Players
Next is the utilities sector. Utilities were sold off after the TCJA in late December of last year. The argument was that regulated utilities were not going to be beneficiaries of the corporate tax cut from 35% to 21%. Because most public utility commissions (PUCs) set rates based on production costs and profitability, the lower tax rates would mean more profits, so PUCs were set to reduce regulated rates.
However, with the economy expanding, power and other utility companies are set to see further demand, raising revenues. And many power companies also have unregulated business units that are benefitting from lower corporate tax rates.
In addition, many of the power companies have been expanding their renewable energy businesses, which also receive many financial and other incentives which bolster their profitability.
As a result, more in the market are catching on to this sector, which is now beginning its renewed ascent as seen in the S&P Utilities Select Sector Total Return Index which is up from its recent low on Feb. 8 to date by 12%.
The ETF to buy for this sector is the Utilities Select Sector SPDR ETF (NYSE:XLU), with an expense ratio of 0.13%. This is the easy means to capitalize on this market segment that’s firmly on the rebound.
Real Estate Is Really Better
Next is real estate. Real estate investment trusts (REITs) were another group of companies that were dumped after the tax cuts of December 2017. The argument was that the benefit of being passthroughs that don’t have to pay corporate income taxes meant the tax cuts didn’t help them. And then the fear of a spike in interest rates meant that their dividends were going to be less attractive to investors.
Both arguments have been ill-formed. First, the TCJA had a specific tax cut for individual investors which gives them the ability to deduct 20% of the distributed dividend income from their tax liabilities. This makes REITs even more attractive for investors on an after-tax basis.
Then interest rates didn’t spike, and given Federal Reserve policies and guidance, rates are merely edging into a more normal range, which along with improved lending conditions in the banking and credit markets makes it even easier for REITs to fund development of their businesses.
REITs are now solidly on the rise as evidenced by the Bloomberg REIT Index which from its low on Feb. 8 of this year is showing a return of 14.6%.
The best ETF for this market is the Vanguard Real Estate ETF (NYSEARCA:VNQ), with an expense ratio of 0.12%. This is the low-cost, high-performing ETF to cover a REIT sector that is in full rally mode for the summer and beyond.
Time for Tech
And last up is technology. Technology has remained firmly on the ascent even as the general stock market has set into a period of malaise. Companies continue to ramp up their capital spending on information technologies — from servers and switches to cloud services — at an increasing pace.
This spending is driving revenues to the leading companies in the U.S. that dominate the technology market. And the result is that the tech market as tracked by the S&P 500 Information Technology Index has turned in a return for the trailing year of almost 30%.
This should continue with the robust demand for the industry. In addition, many of the leaders in this market continue to reform their operations from one-off product sales to recurring product and service sales. This means more certainty for their businesses and better returns for shareholders.
The ETF for this segment is newer to the market, but it is run by one of the best in the low-cost fund management business. The Vanguard Information Technology ETF (NYSE:VGT) provides exposure to the leaders in this successful market sector for an expense ratio of 0.1%.
Neil George is the editor for Profitable Investing and by company policy does not have any current holdings in the securities mentioned above.
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