Although the Fed seems poised to keep emergency measures on the economy until 2014 at the earliest, key sections of the U.S. market are surging higher. This has been best evidenced by the performances out of key bellwethers in recent days which have heavy exposure to cyclical industries such as manufacturing or consumer discretionary products. These industries often slump when the economy is tumbling, but are among the biggest winners when the economic environment is becoming more favorable. Given the recent earnings reports from some of these companies, as well as strong stock performances in the sectors in recent days, it isn’t unreasonable to assume that we are entering a bull phase for these cyclical stocks (read Which Auto ETF Should You Take For A Ride?).
In light of this, investors may want to consider tilting their portfolio to these segments which can include companies which are heavily exposed to products such as vehicles and business hardware or discretionary and leisure items on the consumer side. Should the current economic trends continue, and if more cyclical companies like CAT report solid earnings, we could see further gains in this space over the next few months. While making a play on an individual consumer stock could be a way to go, those seeking to make a broad play on cyclical firms could be better served by purchasing an ETF instead. For these investors, we highlight three ETF picks below that have heavy exposure to cyclical industries:
If investors expect consumers to rebound more than industrial demand, a tilt towards the leisure and entertainment sectors could be an interesting play. One option in this space is PEJ a fund that tracks a benchmark of about 30 firms that are engaged in the design, production or distribution of goods or services in the leisure and entertainment industries. Additionally, investors should note that the product looks to evaluate firms along a variety of metrics, only including those with the most favorable characteristics in the fund (also read Are Telecom ETFs In Trouble?).
Currently, the product is heavy in content providers like CBS and Viacom (NasdaqGS:VIA - News), while it also has a good deal of exposure to the food sector with stocks such as Chipotle (NYSE:CMG - News), Yum! (NYSE:YUM - News) and Starbucks (NasdaqGS:SBUX - News) occupying the top five holdings. If stocks continue to rise and consumers feel more willing to open up their pocketbooks, these companies could continue to benefit in the near term as well. In fact, PEJ has gained close to 5.0% in the past month alone, outpacing SPY by nearly 40 basis points in the period.
If investors are expecting a broad increase in demand from the industrial space, a closer look at the steel sector could be in order. Steel finds its way into a number of products ranging from appliances and cars to more industrial components such as ships, buildings, and bridges. If the economy continues to rebound, steel demand could jump higher and push companies that have heavy exposure to the space higher in the months ahead.
In order to broadly play the space, investors could consider SLX for purchase as the fund tracks a broad benchmark of companies engaged in some aspect of the steel industry. This includes both steel producers such as ArcelorMittal (NYSE:MT - News) and Posco (NYSE:PKX - News), as well as iron ore producers such as Rio Tinto and Vale. This gives the fund broad access to the space ensuring that all segments of the steel supply chain are represented. Recently, investors have been flowing back into the space in order to benefit from the aforementioned trends. The product has gained nearly 16.2% in the past month which represents a huge reversal from longer term figures in which SLX slumped by nearly 34.5% in 2011 (read Steel ETFs Head-to-Head).
For those seeking a commodity play, copper looks to be a quality choice. The metal plays a crucial role in a variety of very cyclical industries including plumbing, industrial production, and most importantly, electrical wiring. Thanks to these uses, and the lack of copper demand from the investment community as a hedge like its precious metal counterparts, the metal tends to be more impacted by economic trends than others in the space. As a result, investors could make a play on greater demand by purchasing this ETN from iPath. The note tracks the return available from front month copper futures while also giving the return to investors from T-Bills. With this focus, JJC has been another star performer to start the year as this copper ETN has risen by just under 13% in the past month which is a sharp contrast to the 25.5% loss in 2011 (see Inside The FlexShares Natural Resource ETF).
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