The financial sector is attracting a lot of investor attention lately. With President Donald Trump passing the tax reform as law, analysts are highly optimistic about the financial sector's performance. Moreover, with better-than-expected job growth, investors are betting on faster rate rises and inflation.
Higher interest rates are known to be a positive for the financial sector and strong job growth may drive consumer spending higher. Moreover, the tech sector is another sector every investor flocks to during periods of rising rates, owing to their low debt commitments.
Cause for Appeal
Per data released by the Labor Department, wages grew 2.9% year over year in January compared with 2.6% in the prior month, the highest pace since April 2009. As a result, investors are betting on the Fed to adopt an aggressive rate hike stance and inflation making a comeback.
Moving on to interest rates, the Fed is widely expected to hike interest rates multiple times this year to tame inflation. Given this, markets are betting on the Fed to hike rates more than three times suggested earlier. Per the CME Fed Watch tool, there is a 71.9% chance of a 25 basis point rate hike in March (read: 6 Ways to Build a Rate-Proof Portfolio With ETFs ).
Rate hikes are particularly positive for financial stocks, as it leads to an increase in the prime rates, at which banks lend to customers.
Moving on to discretionary stocks, these are cyclical and an improving employment scenario makes consumers more likely to spend beyond the necessities. As a result, consumer-discretionary stocks might see a rise, as strong job growth drives consumer confidence higher. Conference Board's measure of consumer confidence increased to 125.4 in January compared with 122.1 in the prior month. It surpassed economists' expectations of 123.1.
Coming to technology funds, low debt requirements to finance expenses might cause the tech sector to outperform other sectors. The developments in the virtual reality and artificial intelligence space have given a boost to this sector. Moreover, stronger global spending has made stocks in this sector rally.
Let us now discuss a few ETFs focused on providing exposure to the discussed sectors.
Financial Select Sector SPDR Fund XLF
This fund seeks to provide exposure to financial stocks in the U.S. equity markets. It has AUM of $32.3 billion and charges a low fee of 13 basis points a year.
The fund's top three holdings are JPMorgan Chase & Co JPM , Berkshire Hathaway Inc Class B BRKB and Bank of America Corp BAC with 11.5%, 11.3% and 8.9% allocation, respectively. The fund has returned 20.0% in a year and 0.6% year to date. XLF has a Zacks ETF Rank #2 (Buy), with a Medium risk outlook.
Consumer Discretionary Sector SPDR Fund XLY
This fund seeks to provide exposure to consumer discretionary stocks and tracks the Consumer Discretionary Select Sector Index. It has AUM of $13.0 billion and charges a low fee of 13 basis points a year.
The fund's top three holdings are Amazon.com Inc AMZN , Home Depot Inc HD and Comcast Corp A CMCSA with 19.2%, 7.5% and 6.2% allocation, respectively. The fund has returned 20.8% in a year and 3.6% year to date. XLY has a Zacks ETF Rank #3 (Hold), with a Medium risk outlook.
Technology Select Sector SPDR Fund XLK
XLK is a relatively cheaper bet on the technology sector. This fund has AUM of $19.2 billion and charges a fee of 13 basis points a year. Apple Inc AAPL , Microsoft Corp MSFT and Facebook Inc FB are the top three holdings of the fund, with 14.0%, 11.5% and 7.1% allocation, respectively. The fund has returned 27.9% in a year and 1.1% year to date. XLK has a Zacks ETF Rank of #2, with a Medium risk outlook.
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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report J P Morgan Chase & Co (JPM): Free Stock Analysis Report Bank of America Corporation (BAC): Free Stock Analysis Report Amazon.com, Inc. (AMZN): Free Stock Analysis Report Facebook, Inc. (FB): Free Stock Analysis Report Home Depot, Inc. (The) (HD): Free Stock Analysis Report Comcast Corporation (CMCSA): Free Stock Analysis Report Apple Inc. (AAPL): Free Stock Analysis Report Microsoft Corporation (MSFT): Free Stock Analysis Report SPDR-TECH SELS (XLK): ETF Research Reports SPDR-FINL SELS (XLF): ETF Research Reports SPDR-CONS DISCR (XLY): ETF Research Reports To read this article on Zacks.com click here. Zacks Investment Research Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report