Markets
RTH

4 Sector ETFs for Q4

An image of a pen on a graph
Credit: Shutterstock photo

The American economy is moving ahead slowly and the Fed on the verge of a policy shift. The final quarter of 2015 thus might just mark a historic transition in market movement and investor behavior as the present market sentiments are muddled with global growth worries, a steady U.S. economy and a looming Fed lift-off.

In any case, U.S. market trading always remains busy in the fourth quarter with loads of sales-boosting events - including Halloween, Thanksgiving, Cyber Monday, Black Friday and Christmas - falling in this quarter.

Plus, the Fed is still being dovish (though chances of tightening by the end of this year can't be ruled out) and the stubbornly low oil prices continue to make consumers' wallets fat. All these point to a risk-on trade sentiment in the market and some interesting trends are starting to develop. Investors should also note that we are also just a few days away from properly stepping into the third quarter earnings season which would also leave some impact on Q4 trading activities.

In this backdrop, we highlight four lucrative sector ETFs that could be used to book some profits in the present volatile market, threatened by global issues and ambiguity over the rate hike timeline at home. Each offer is intriguing enough to fight any sudden emergence of negative economic news as we have kept expected earnings and revenue growth (for Q4) in mind while arriving at these sector ETFs (read: Winning ETF Strategies for Q4 ).

Retail -Market Vectors Retail ETF (RTH)

What could a better choice than retail while picking sector ETFs for Q4? The end of the year is normally saved for consumers' shopping euphoria for various occasions, and retail sales get an expected boost. According to Equity Clock , "the period of seasonal strength for the consumer discretionary sector ranges from October 17 th through to April 12 th (read: The Complete Guide to Retail ETFs ).

The sector is expected to post earnings growth of 5.7% in Q4, even better than the consumer discretionary sector's expected earnings growth of 2.2%. Its sales expectation is also steady at 7.1% for Q4, again better than 4.1% growth expected from the consumer discretionary space. More jobs and cheaper fuel should help these sectors to grow.

RTH fund has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook. The fund advanced 0.3% in the last one month (as of October 2, 2015). Investors can also have a look at PowerShares DWA Consumer Cyclical Momentum ETF (PEZ) which lost about 0.1% during the same frame. The rank for PEZ was recently upgraded to Zacks ETF Rank #1 from #3 (Hold).

Technology -iShares North American Tech-Software (IGV)

The technology sector saw pretty choppy trading ahead of the Q3 earnings season, with most tech ETFs falling by the wayside. This high-growth space was mainly hit by a global slowdown. Otherwise the fundamentals are quite strong. The sector is likely to see revenue growth of 7.3% in Q4 following an expected revenue lift of 8.8% in Q3. But expected earnings growth is likely to be tepid with Q3 expected to record 2.6% expansion and Q4 projected see 0.8% decline.

This ETF provides exposure to the software segment of the broader U.S. technology space by tracking the S&P North American Technology-Software Index. The fund was up 2.4% in the last one month (as of October 2, 2015), making it the best among the pack. The fund has been upgraded from a Zacks ETF Rank #3 to #2 (Buy) (see all Technology ETFs here).

Financials - iShares U.S. Financials ETF (IYF)

The financial sector might have come under pressure post Fed meeting and the below par jobs' report in September which raised questions over the health of the U.S. economy and the fate of the impending Fed policy tightening.

But it might witness a turnaround if the Fed opts for a lift-off in Q4. After all, San Francisco Federal Reserve Bank President has reinstated a rate hike possibility in ' sometime later this year. Almost a full-employment level and surging house prices prompted him to think so.

In any case, U.S. banks are in a much better shape right now. Banks recorded a 66.7% beat on earnings on 60% top-line beat in Q2. Overall, the financial sector is expected to deliver stellar earnings growth of 8.6% and 15.1% in Q3 and Q4, respectively. However there will be no top line growth - in fact revenues will likely slip 4.6% in Q3 and 3.2% in Q4.

Notably, a broader financial ETF looks to be a better bet right now as specific corners like regional banking might lag if the Fed stays put for the entire Q4. Broader financial ETF IYF is down 6.4% but gained on October 2 despite a soft job report.

IYF invests 31% in banks followed by 24.6% in diversified financials and 21.2% in real estate. Investors should note that real estate performs better in a low rate environment. The fund has a Zacks ETF Rank #2 with a High risk outlook (read: Guide to the 7 Most Popular Financial ETFs ).

Transportation - iShares Dow Jones Transportation Average Fund ( IYT )

With the holiday season taking charge over the fourth quarter, travelling and other activities should perk up. Plus, stepped-up economic activities and cheap fuel are still there to drive transportation stocks.

The transportation sector is expected to report 13.3% and 0.4% growth in earnings and revenues, respectively. One way to play this trend is with IYT . The ETF tracks the Dow Jones Transportation Average Index, giving investors exposure to a small basket of close to 25 securities. IYT lost just 0.04% in the last one month but might accelerate in Q4. However, investors should note that unlike other options, IYT has a Zacks ETF Rank #3.

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 >>

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

MKT VEC-RETAIL (RTH): ETF Research Reports

PWRSH-DW CON CY (PEZ): ETF Research Reports

ISHARS-US FN SE (IYF): ETF Research Reports

ISHARS-NA TEC-S (IGV): ETF Research Reports

ISHARS-TRAN AVG (IYT): 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

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

RTH IYT PEZ IYF IGV

Other Topics

ETFs

Latest Markets Videos

    Zacks

    Zacks is the leading investment research firm focusing on stock research, analysis and recommendations. In 1978, our founder discovered the power of earnings estimate revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank. A wealth of resources for individual investors is available at www.zacks.com.

    Learn More