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Bet on Top-Ranked Sectors With These ETFs & Stocks

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·7 min read
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Thanks to solid corporate earnings and a fresh large infrastructure bill, the Wall Street bulls are charging higher. The Q2 earnings season has been showing impressive momentum on the revenue side in terms of both growth and the beat percentages. In fact, the strength is broad-based with earnings on track to reach a new all-time record.

Meanwhile, the Senate has passed a $1 trillion infrastructure bill, which would be one of the most substantial federal investments in roads, bridges and rails in decades. The bill, which includes $550 billion in new spending on roads, bridges, and Internet access, will now head to the House of Representatives.

Further, the U.S. economy returned to the pre-pandemic level with GDP rising 6.5% annually in the second quarter, indicating a sustained recovery from the pandemic recession, while consumer confidence rose to a 17-month high in July. Meanwhile, the labor market recovery has boomed with more than half of the lost jobs during the pandemic recovered until July (read: U.S. Economy Returns to Pre-Pandemic Level: 4 ETF Picks).

However, the rising Delta variant of COVID-19 cases has triggered worries over the sustainability of the economic growth. The United States is now averaging more than 100,000 new COVID-19 cases every day, the highest in almost six months.
 
Against such a backdrop, investors should look at the ETFs and stocks from the top-performing sectors.

How to Find the Top-Performing Sectors

While identifying the top-performing sector is a daunting task, the Zacks Industry Rank makes this process simpler. The Zacks Industry Rank is determined by calculating the average Zacks Rank for each stock in the industry and then assigning a rank to it. First, we selected the best industries that have a top Zacks Rank.

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 it up (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 265 or X-level industries. We rank all 265 X-level industries on the basis of the earnings outlook of the constituent companies into two groups: the top half (i.e., industries with the best average Zacks Rank) and the bottom half (the industries with the worst average Zacks Rank).

The top 132 Zacks Ranked industries feature in the top 50% of all X-level industries whereas the bottom 133 Zacks Ranked industries are in the bottom 50%.

Retail

The retail sector is poised to benefit from a huge infrastructure spending package, boosting consumer spending and confidence. Most of the industries in the sector currently possess a top rank with Retail - Catalog Shopping, Automotive - Retail and Whole Sales and Automotive - Retail and Whole Sale Parts falling under the industry Rank of top 3%.

SPDR S&P Retail ETF XRT: With AUM of $1.1 billion, this product tracks the S&P Retail Select Industry Index, holding 107 securities in its basket. Automotive retail, Internet & direct marketing retail, apparel retail, and specialty stores are the top four sectors with a double-digit allocation each. The fund charges 35 bps in annual fees and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: 5 Winning ETF Strategies for the Second Half).

Penske Automotive Group Inc. PAG: This company is engaged in the operation of automotive and commercial truck dealerships in the United States, Canada and Western Europe. The stock saw positive earnings estimate revisions of $3.33 for this year in the past 30 days and has an expected earnings growth of 84%. Penske Automotive has a Zacks Rank #1 and Growth Score of A.

Finance

Accelerating economic growth, a strengthening job market and growing consumer confidence will likely lead to higher demand for loans and all types of financial services. As such, it belongs to the attractive sector with Insurance - Brokerage leading the way followed by Banks - Southwest (top 15%), Insurance - Property and Casualty (top 15%), and Banks - West (top 20%).

iShares U.S. Broker-Dealers & Securities Exchanges ETF IAI: This fund offers exposure to the U.S. investment banks, discount brokerages, and stock exchange firms by tracking the Dow Jones U.S. Select Investment Services Index. The product currently holds 25 securities and charges 41 bps in annual fees. It has $959.2 million in AUM and has a Zacks ETF Rank #2 with a High risk outlook (read: Finance ETF Hits New 52-Week High).

Marsh & McLennan Companies Inc. MMC: This globally leading insurance broker provides risk and insurance services, risk consulting, and employee benefits consulting services to clients worldwide. The stock saw positive earnings estimate revisions of 44 cents for this year in the past 30 days and has an expected growth rate 22.1%. It has a Zacks Rank #2 and Growth Score of B.

Transport

Travel has rebounded strongly as more Americans are getting vaccinated, business and economy have reopened, and consumer confidence is growing. A strong summer driving season is also expected to add fuel to transportation. Equipment and Leasing (top 13%) and Truck (top 13%) are leading the sector higher followed by Services and Air Freight and Cargo.

iShares U.S. Transportation ETF (IYT): The fund tracks the S&P Transportation Select Industry FMC Capped Index, giving investors exposure to a basket of 45 securities. Railroads takes the top spot with 34.6% of the portfolio while air freight & logistics, trucking and airlines round off to the next three spots with a double-digit exposure each. The fund has accumulated $1.6 billion in AUM and charges 42 bps in annual fees. It has a Zacks ETF Rank #2 with a High risk outlook (read: 4 Sector ETFs to Sizzle on Solid July Jobs Data).

Ryder System Inc. (R): This company is one of the world's largest providers of integrated logistics and transportation solutions. It saw positive earnings estimate revision of $1.25 for this year in the past month and has an estimated growth rate of more than 100%. The stock has a Zacks Rank #1 and Growth Score of A.

Basic Materials

The materials sector, which tends to be the most sensitive to global economic growth expectations, has been performing well with economic recovery gathering pace. The increase in prices of various types of raw materials added to the strength. As such, Mining – Iron, Steel – Speciality and Steel - Producers fall within the most attractive industries with a rank in the top 1%, top 4% and top 4%, respectively.  

Invesco DWA Basic Materials Momentum ETF PYZ: This ETF tracks the Dorsey Wright Basic Materials Technical Leaders Index, giving investors exposure to 33 stocks that are showing relative strength (momentum). Metals & mining dominates the fund’s returns at 43.8% while chemicals accounts for 39% of the portfolio. The fund has amassed $211.2 million in its asset base while charges 60 bps in fees and expenses. It has a Zacks ETF Rank #2 (Buy) with a High risk outlook.

Arch Resources Inc. ARCH: It is one of the largest coal producers in the United States, operating nine mines across the major coal basins of the country. The stock witnessed positive earnings estimate revision of $3.20 for this year in a month and has projected an earnings growth rate of 137.6%. The stock has a Zacks Rank #1 and Growth Score of B.


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
 
Penske Automotive Group, Inc. (PAG) : Free Stock Analysis Report
 
Marsh & McLennan Companies, Inc. (MMC) : Free Stock Analysis Report
 
SPDR S&P Retail ETF (XRT): ETF Research Reports
 
iShares U.S. BrokerDealers & Securities Exchanges ETF (IAI): ETF Research Reports
 
Arch Resources Inc. (ARCH) : Free Stock Analysis Report
 
Invesco DWA Basic Materials Momentum ETF (PYZ): ETF Research Reports
 
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Zacks Investment Research