ETFs
5 Top-Ranked Sector ETFs to Buy in June
Wall Street has seen a remarkable rally so far this year, with all three major indexes near their all-time highs. Strong corporate profits, bets on Fed rate cuts and the rise of AI have driven the rally.
Profits rose 6% in the first quarter of 2024, the highest growth rate seen in almost two years. Recent economic data showed that the U.S. economy is once again on track for another solid increase in GDP in the second quarter. Growth in U.S. business activity accelerated sharply to its fastest pace in more than two years in May, following two months of slower growth, driven by a recovery in the services sector. Consumer confidence, as indicated by the Conference Board Confidence Index, increased in May after three months of decline.
Additionally, Wall Street has become more bullish on stocks given the improving outlook for earnings and economic growth. Over the past two weeks, three equity strategists tracked by Yahoo Finance have raised their year-end targets for the S&P 500. The median target on Wall Street for the benchmark index now stands at 5,250, up from 4 850 on December 30. , according to Bloomberg data.
However, uncertainty over the timing of the Fed’s rate cuts will weigh on investor confidence in the weeks to come. The latest data from the Institute for Supply Management showed the U.S. manufacturing sector contracted in May for the 18th time in 19 months, hit particularly hard by high interest rates.
The Fed’s latest minutes highlight concerns about stubborn inflation. Although inflation has eased over the past year, it has failed to move toward the Fed’s 2% target in recent months. As such, the disinflation process would likely take longer than expected, according to the Fed minutes. Additionally, geopolitics will remain an issue.
In such a context, investors could be well served by ETFs from sectors with top-ranked industries.
Here’s how to find the best performing sectors
Although identifying top-performing industries is a daunting task, the Zacks Sector Rank simplifies this process. The Zacks Sector Rank is determined by calculating the average Zacks Rank of all stocks in the industry and then assigning it an ordinal rank. For example, an industry with an average Zacks Rank of 1.6 is better than an industry with an average Zacks Rank of 2.3. So, the sector with the highest average Zacks Rank would get a better Zacks Sector Rank.
Zacks classifies all stocks into one of 16 sectors. The average Zacks Rank is calculated daily for each sector. So, if an industry has the highest average Zacks Rank, it will be considered the #1 industry (1 of 16), putting it in the top 1% of Zacks Rank industries.
The top 8 Zacks Ranked industries would be in the top 50% of industries, while the bottom 8 Zacks Ranked industries would be in the bottom 50% of industries.
We selected an ETF, with a Zacks ETF Rank #1 (Strong Buy), #2 (Buy), or #3 (Hold), from some of the top-ranked sectors.
Construction: Zacks Sector Rank 1
Facing the twin headwinds of high prices and continued high mortgage rates, the U.S. real estate sector looks attractive given that approximately 70% of the industries in this sector are among the best, with heavy construction and home builders ranking among the first 10%.
SPDR S&P Home Builders ETF (NYSE: It tracks the S&P Homebuilders Select Industry Index, holding 35 stocks in its basket. The SPDR S&P Homebuilders ETF is the most popular option in the homebuilding space, with $1.8 billion in assets under management and an average daily volume of 2.4 million shares. The product charges 35 basis points in annual fees and has a Zacks ETF Rank #3.
Consumer Staples: Zacks Sector Rank 4
Consumer Staples saw the Zacks Sector Rank jump three notches from 7 last week. The sector generally acts as a refuge during times of political and economic turmoil. Stocks in these sectors typically outperform during periods of low growth and high uncertainty. Publishing – Newspapers, funeral services, staples, and soap and cleaning products rank in the top 19% of industries.
Selected Consumer Staples Sector SPDR Funds (NYSE:XLP) is the most popular consumer staples ETF with $15.2 billion in assets under management and an average daily volume of 12.5 million shares. It provides exposure to companies primarily involved in the development and production of consumer products that span the retailing of food and medicine, beverages, groceries, tobacco, household products and personal products. The Consumer Staples Select Sector SPDR fund tracks the Consumer Staples Select Sector Index and holds 38 stocks in its basket. XLP charges 9 basis points in annual fees and currently has a Zacks Rank #3.
Materials – Zacks Sector Rank 5
The materials sector, which tends to be most sensitive to global economic growth expectations, is expected to see smooth trading given the improving global economy. The Zacks Sector Rank fell from 6 to 5 in the past week.
Vanguard Materials ETF (NYSE: VAW) has amassed $3 billion in its asset base and offers exposure to 116 stocks tracking the MSCI US Investable Market Materials 25/50 Index. The ETF has an expense ratio of 0.10%, while volume is low at 40,000 shares. Specialty chemicals and industrial gases occupy the largest share at 25.3% and 20.8%, respectively. The product has a Zacks ETF Rank #2 with a Medium Risk Outlook.
Industries – Sector Zacks Rank 5
The industrial sector is expected to benefit as business conditions have improved and demand appears solid. About 70% of industries fall into the highest-ranked category. Manufacturing – Material Handling, Wire & Cable Products, Uniforms & Related Products, Metal Products – Sourcing & Fabrication, Manufacturing – Thermal Products, Steel – Pipe & Tube are in the top 6%.
Industrial Select Sector SPDR (NYSE:XLI), with a Zacks ETF Rank #2, seems like an exciting pick. It targets the industrial sector as a whole and tracks the Industrial Select Sector Index. XLI holds 79 stocks in its basket and is well distributed across sectors, with aerospace and defense, machinery and ground transportation each accounting for a double-digit share. Industrial Select Sector SPDR is the most popular ETF with $18 billion in assets under management and an average daily volume of approximately 8.5 million shares. It charges 9 basis points in fees per year.
Aerospace – Sector Zacks Rank 7
The aerospace and defense sector tends to benefit from rising geopolitical tensions, which result in increased defense spending globally. iShares US Aerospace & Defense ETF (BATS:ITA) provides exposure to U.S. companies that manufacture commercial and military aircraft and other defense equipment by tracking the Dow Jones US Select Aerospace & Defense Index. He holds 34 stocks in his basket with assets under management of $6.3 billion and an expense ratio of 0.40%.
The iShares US Aerospace & Defense ETF trades with an average daily volume of approximately 426,000 shares. It has a Zacks ETF Rank #2 with a Medium Risk Outlook.
To read this article on Zacks.com click here.