The third-quarter was a downbeat period for investors, mainly due to rising rates. A cooling U.S. economy, falling consumer confidence, a real estate crisis in China, a series of bank downgrades also made matters worse for Wall Street. However, all were not downbeat for the broader market as there were ebbing U.S. recession fears along with several upbeat economic data points and a decent Q2 earnings season.
The S&P 500 (down 3.4%), the Dow Jones (down 2.2%), the Nasdaq (down 4.3%) and the Russell 2000 (down 5%) – all four key U.S. equity gauges have slumped in the third quarter (as of Sep 28, 2023) (read: Best & Worst ETF Areas of Q3).
Inside Key Developments of Q3
The Federal Reserve, in its latest meeting, enacted one rate hike worth 25 bps in July and kept interest rates steady at a 22-year high in the range of 5.25% to 5.5% but signaled one more hike this year. Oil prices remained at a solid shape due to reduced supplies and ebbing U.S. recession fears.
Saudi Arabia prolonged its voluntary one-million-barrel oil supply cut through to the end of the year. Russia too has moved to draw down global inventories and vowed to cut oil exports by 300,000 barrels per day until the end of the year.
The Artificial Intelligence (AI) boom fizzled a bit in the third quarter hurt by higher rates. Meanwhile, One of the most significant developments in 2023 for the Bitcoin ecosystem was the legal victory in the U.S. Court of Appeals for the D.C. Circuit, involving Grayscale and the U.S. Securities and Exchange Commission (SEC) on Aug 29.
China stocks hit a high in late July only to record a slump in August. A slump in the manufacturing sector and most importantly, chaos in the real estate market led to the chaos in the China’s equity market. Meanwhile, India ETFs rose to prominence in the third quarter.
Top-Ranked ETF Winners of Q3 With More Room for Growth
Below we highlight a few ETFs that have an upbeat Zacks Rank #1 (Strong Buy) or #2 (Buy). These ETFs have a lower P/E than the S&P 500 (i.e. 20X). The fundamentals are also in favor of these ETFs.
Financial Select Sector SPDR ETF (XLF) – Zacks Rank #1; P/E: 14.12X; 3-Month Gains: 1.4%
The journey this year for bank ETFs has been anything but smooth this year. But the tables are probably turning for the segment as the rates are peaking and the yield curve is steepening. Such an interest rate environment will boost banks’ net interest rate margin. Regional deposits and loans also rose in the middle of the year. Plus, most bank ETFs have a cheaper valuation than the S&P 500.
Communication Services Select Sector SPDR ETF (XLC) – Zacks Rank #2; P/E: 17.40X; 3-Month Gains: 1.4%
The AI boom is quite prominent in this space. Mega-cap stocks like Meta and Alphabet rule the fund and will likely prove to be a tailwind for the fund in future. The blockbuster movie Barbie, which marked a historic moment in the film industry, in the third quarter, led to growth in prices of the fund (read: Top ETF Stories of Q3).
Invesco S&P SmallCap Value With Momentum ETF (XSVM) – Zacks Rank #2; P/E: 7.89X; 3-Month Gains: 4.9%
The pint-sized stocks should gain momentum in the final quarter of 2023 due to a decent U.S. economic recovery, the upcoming holiday season and a still-resilient consumer base. Since small-cap stocks are closely tied to the domestic economy, an uptick in economic outlook bodes well for small caps. These stocks are not heavily export-centric and, hence, do not get battered if the greenback rises. Most importantly, higher rate environment bodes well for the value stocks (read: 3 Reasons Why Small-Cap Value ETFs Could Emerge Winners).
Invesco S&P 500 Enhanced Value ETF SPVU – Zacks Rank #2; P/E: 8.60X; 3-Month Gains: 2.2%
Investors who prefer the broad-based S&P 500 investing, may consider this fund. The S&P 500 gives an exposure to large-cap stocks that are less-volatile in nature. But in this case also, value stocks should perform better as rates are rising.
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