TopRanked ETFs From TopPerforming Sectors

Post on: 8 Май, 2015 No Comment

Zacks Funds — Seeking Alpha — Thu Mar 12, 7:52AM CDT

As the U.S. economy gains momentum and hiring remains solid, the six-year old bull market seems to have legs. This is especially true as the world’s largest economy recorded the strongest annual job growth since the late 1990s over the past 12 months, and the jobless rate dropped to a six-and-half year low of 5.5% in February from a high of 10% in 2009.

Notably, the total number of jobs created during November through January recorded the largest three-month gain since 1997. Further, stepped-up economic activities, rising business and consumer confidence, record corporate profits, and recovering housing fundamentals are continuously injecting optimism into the economy.

Apart from domestic fundamentals, improving global conditions buoyed by monetary easing policies also helped the U.S. stocks to move higher. In particular, Japan came out of recession, and sentiments are turning bullish on Europe, backed by a slew of positive economic indicators and a four-month Greece bailout extension. Further, Russia is finding its footing this year, while India and China continue to show resilience. Even oil has rebounded from its multi-year low after a seven-month brutal plunge.

Though the Fed is on track to raise interest rates later in the year, uncertainty about the actual timing of interest rates hike is a global concern and might keep returns at check. In fact, the yield on 10-year Treasury bonds has risen 33% in the past five weeks (ending March 6), representing the sharpest 5-week increase in 20 years (read: 3 ETFs to Watch on Rising Rates ).

Further, diverging central bank policies between the U.S. and the other developed and developing nations have intensified the currency war. This is propelling the U.S. dollar to multi-year highs against the basket of currencies. Given the fears of rate hike and a strengthening dollar, U.S. stocks tumbled as the bull market entered its seventh year. In fact, the S&P 500 and Dow Jones dropped over 1.7% in yesterday’s trading session, erasing all the gains made so far this year.

Given this sudden bout of volatility, investors should look at the ETFs of the top-performing sectors.

How to Find Top-Performing Sectors

While identifying the top-performing sector is a daunting task, the Zacks Industry Rank makes this process simpler. First, we have to find out the best industries that have earned top Zacks ranks. The Zacks Industry Rank is determined by calculating the average Zacks Rank for all of the stocks in the industry, and then assigning an ordinal rank to it.

A top Zacks Industry Rank means that more stocks within that group are seeing upward earnings estimate revisions. Since an industry is a group of stocks in a similar business, this is the perfect way to size up an industry (read: all the Top Ranked ETFs ).

The Zacks Industry classification divides the business world into 16 sectors comprising 60 medium or M-level industries and 260 plus or X-level industries. We rank all 260 plus X-level industries based on the earnings outlook of the constituent companies in each industry. Lower scores are always better. Industries having a rank of 2.00-2.64 and 2.65-2.81 indicates that they are very attractive and attractive, respectively, and thus the top-performing ones.

Top-Ranked ETFs in Focus

We have found a number of ETFs that have the top Zacks ETF Rank of 1 (Strong Buy) or 2 (Buy) in these top-performing sectors, and are thus expected to outperform in the months to come. The trio has enjoyed a strong momentum, and is leading the broad market fund (NYSEARCA:SPY ) by wide margins from the year-to-date look. As such, these could be excellent picks to tap the best sector going forward.

Vanguard Information Technology ETF (NYSEARCA:VGT )

Information technology is the most attractive sector at present, with miscellaneous technology, computer-office equipment, and semiconductors leading the way. One interesting way to play the broad sector is with VGT, which provides exposure to a large basket of 393 technology stocks by tracking the MSCI US Investable Market Information Technology 25/50 Index.

The fund is largely concentrated on the top firm — Apple (NASDAQ:AAPL ) — at 16.8%, followed by Microsoft (NASDAQ:MSFT ) and Google (GOOG. GOOGL ) with over 7% share each. Other firms hold less than 4% of assets. However, the product is well spread out across a number of industries, with hardware & storage, software & services, system software, semiconductors, and data processing & outsourced services each accounting for double-digit allocation in the basket.

This fund manages about $7.2 billion in asset base and trades in good volume of 416,000 shares a day, on average. It charges 12 bps in annual fees, and has added 3.6% so far this year. The product has a Zacks ETF Rank of 1, with a Medium risk outlook (read: Bet on These Top Ranked Tech ETFs for Outperformance ).

First Trust Consumer Discretionary AlphaDEX ETF (NYSEARCA:FXD )

Consumer discretionary is also expected to outperform, with consumer electronics at the top, followed by home furnishings. FXD is one of the popular and liquid ETFs in the consumer discretionary space, with AUM of $2.3 billion and average daily volume of 754,000 shares per day. It charges 70 bps in annual fees.

The fund follows an AlphaDEX methodology, and ranks stocks in the space by various growth and value factors, eliminating the bottom-ranked 25% of the stocks. This approach results in a basket of 132 stocks that are well spread out across each security, with none holding more than 1.50% of assets. GameStop (NYSE:GME ), Graham Holdings (NYSE:GHC ) and Dollar Tree (NASDAQ:DLTR ) occupy the top three positions in the basket.

In terms of industry exposure, specialty retail is the top sector, making up for nearly one-fourth of the portfolio, while hotels, restaurants & leisure, media, and household durables round off the next three spots with a double-digit allocation each. The fund has added 1.6% in the year-to-date time frame and has a Zacks ETF Rank of 1, with a Medium risk outlook.

SPDR S&P Health Care Services ETF (NYSEARCA:XHS )

While biotech and pharma is currently an unattractive industry, medical care will be the outperformer in the healthcare space. As a result, XHS seems to be an interesting pick to play the healthcare space. The fund uses equal-weight methodology to each security by tracking the S&P Health Care Services Select Industry Index. Holding 54 stocks in its basket, each security accounts for less than 2.5% of total assets. AmSurg (NASDAQ:AMSG ), Centene (NYSE:CNC ) and Air Methods (NASDAQ:AIRM ) are the top three holdings (see: all the Healthcare ETFs here ).

From an industry look, healthcare services, healthcare facilities, and managed healthcare collectively make up for 85.7% share, while healthcare distributors take the remainder. The fund has amassed $154.7 million in its asset base, and trades in light volume of around 30,000 shares a day. The expense ratio came in at 0.35%. The ETF has gained about 6% so far this year and has a Zacks ETF Rank of 2, with a Medium risk outlook.