Markets have remained range bound of late as the participants
continue to analyze every bit of economic or Fed related news for
clues regarding 'tapering' of the QE program. Federal Reserve's
FOMC minutes released last week failed to shed much light, and
recent remarks by some of the Fed officials have only added to the
uncertainty. In anticipation of the inevitable winding down of the
bond purchase program, interest rates have been creeping up.
On the other hand, the US economy continues on its slow and steady
growth path. During the second quarter, the economy grew at 2.5%
annual rate, an upward revision from 1.7% reported earlier and
better than the consensus estimate of 2.2%. (Read:
3 Excellent ETFs for Growing Dividends
Higher exports and business investment suggested that the momentum
will continue into the second half of the year. The drop in weekly
Jobless Claims also pointed towards improvement in the labor
market. Even though quarterly results from some companies have
caused some concerns, the overall economic picture continues to
improve slowly. (Read:
High Dividend ETFs to buy even if Fed Tapers
As a result of favorable economic environment, cyclical sectors
like Technology, Industrials and Consumer Discretionary can be
expected to deliver better returns in the months to come. Improved
outlook for these sectors is reflected in expected earnings growth
rates in 2014 for these sectors in the following table (source:
Zacks Earnings Trends):
Many of the cyclical stocks had lagged behind the boring,
defensive stocks that found investors' favor earlier this
year. As a result some of them look quite attractive on
valuation basis currently. Further, these sectors can be relied
upon to deliver outsized returns when the economy improves. Below
we have analyzed three 'Buy' rated ETFs from these sectors. (Read:
Senior Loan ETFs-the best bey for rising rates?
iShares U.S. Industrials ETF
Manufacturing activity has been showing strong signs of revival,
not only in the US, but also in China and Europe. Healing labor
markets and rising consumer confidence have boosted the demand for
manufactured goods. Improvement in housing markets also
resulted in increased demand for appliances and furniture.
IYJ which tracks the Dow Jones U.S. Industrials Index, made its
debut in June 2000. It has so far amassed $1.2 billion in assets,
which are invested in 223 securities. The fund charges an annual
fee of 46 basis points for its services, while the dividend yield
is decent at 1.41%.
GE is the top holding in the fund with 10.8% of assets, followed by
United Technologies and Union Pacific. From the sector perspective,
General Industrials (21.3%) occupy the largest weight, followed by
Support Services (18.1%) and Aerospace & Defense (16.7%).
IYJ is currently a Zacks Rank #2 (Buy) ETF.
Guggenheim S&P Equal Weight Technology ETF (
Technology sector did not get investor attention this year as some
of the mega players in the sector reported uninspiring results. As
a result, the sector looks quite attractive from valuation
perspective. With an improving economy, tech stocks are expected
reported higher earnings in the coming quarters. Another reason to
be bullish on the sector is increasing dividends and buybacks by
RYT tracks the S&P 500 Equal Weight Index Information
Technology, holding 70 securities in the basket. Launched in
November 2006, the product has so far attracted $225.6 million in
assets, which are invested in 70 securities.
Due to its equal weight methodology, the product greatly reduces
company specific risks. Further as many of the bigger tech names
have been struggling this year, this product has been outperforming
its market cap weighted peers significantly.
Semiconductors (23.0%), IT Services (20.3%) and Software (17.9%)
occupy the top spots in terms of sector allocation. The
product charges an expense ratio of 50 basis points.
RYT is currently a Zacks Rank #2 (Buy) ETF.
First Trust Consumer Discretionary AlphaDEX Fund (
Consumer discretionary sector has been outperforming the broader
market for some time now and the sector does not look cheap from
valuation perspective. However, this sector's performance is
closely related to the state of the economy and it has historically
rewarded investors with outsized returns when economic picture
FXD tracks the
StrataQuant Consumer Discretionary Index which employs the AlphaDEX
stock selection methodology. The fund is one of the popular
Consumer Discretionary equity ETFs with more than $736.2 million in
AUM, which are invested in 131 holdings. With just 14% of its total
assets in the top 10 holdings, the product has little concentration
The product has double-digit allocations to Specialty Retail
(21.3%), and Media (16.7%), whereas
esla Motors, Nu Skin Enterprises and Netflix are its top three
The product charges a slightly higher fee of 70 basis points per
year for its 'enhanced' stock selection methodology.
FXD is a Zacks Rank#1 (Strong Buy) ETF.
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FT-CONSUMR DIS (FXD): ETF Research Reports
ISHARS-US INDU (IYJ): ETF Research Reports
GUGG-SP5 EW TEC (RYT): ETF Research Reports
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