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Cyclical Sector ETFs for an Improving Economy


After a string of better-than-expected economic data, investors are rotating back into cyclical sector stocks and related exchange traded funds.

“The jobs report is clearly a sign of continued and accelerating strength of the economy,” Jeff Korzenik, Chicago-based chief investment strategist at Fifth Third Bancorp., said in a Bloomberg article. “The cyclical leadership in many ways will become more pronounced.”

Last week, U.S. stocks rallied on the dip in the unemployment rate to an almost six-year low, with the Dow Jones Industrial Average trading above 17,000 for the first time, the Dow Jones Transportation Average rising to a record last week and the Russell 2000 coming within a point of an all-time high as well.

Analysts believe that these patterns are harbingers of continued strengthen in the markets, arguing that the data reveals economic growth is permeating through various industries.

“The stock market’s ticker tape is in gear,” Doug Ramsey, chief investment officer at Leuthold Group, said in the article. “This is a very broad move to new highs, which generally means that the earliest the bull market would top out is months in advance, four to six months at minimum.”

Leading the pack, transportation, industrials and small-capitalization stocks have been outperformers. The gains reflect optimistic projections that cyclical sector stocks will generate some of the best earnings growth in the S&P 500 this year.

The iShares Transportation Average ETF (IYT) includes a 23.4% weight toward railroad companies, 22.1% in delivery services, 18.6% in trucking, 15.4% in airlines, 10% in marine tranpsortation, 5.1% in commercial vehicles and 5.0% in transportation services. IYT is up 13.2% year-to-date. [Trendy Transportation ETFs]

The strengthening manufacturing sector is supporting industrials gains. The Industrial Select Sector SPDR (XLI) is up 4.4% year-to-date. XLI top sub-sectors include aerospace & defense 25.4%, industrial conglomerates 18.6%, machinery 18.3%, road & railways 10.1% and air freight & logistics 7.2%. [Rising Factory Orders Support Industrials ETF Recovery]

Additionally, the iShares Russell 2000 ETF (IWM) , which follows the Russell 2000 index of small-cap stocks, is up 3.3% year-to-date.

Tech names have dominated among cyclical sector picks, with Technology Select Sector SPDR (XLK) up 6.9% over the past three months. However, analysts believe that semiconductor makers could stand out, predicting an average 34% increase in profits for 2014, compared to 7.5% for the full S&P 500. For broad semiconductor exposure, investors can take a look at the SPDR S&P Semiconductor ETF (XSD) , which is up 23.2% year-to-date. [Tech ETFs Try to Perk up Ahead of Earnings]

For more information on market sectors, visit our sector ETFs category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.