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Diagnosis of Economy on Health Day: 6 ETFs in Fine Fettle

Sweta Killa

Given Trump and political uncertainties, let us examine the health of the U.S. economy on Health Day and remind investors of some wholesome supplements for a robust investment portfolio.

Similar to the six vital nutrients required for good health, we have figured out the mantra for a robust economy and the six pillars that uphold it. First, we picked six essential market nutrients in the form of sectors and then zeroed in on ETFs that crushed the boarder market over the past one year. Additionally, these funds should have a Zacks ETF Rank of 1 (Strong Buy), 2 (Buy) or 3 (Hold).

Vitamins: Consumer Sector

About two-thirds of overall economic growth comes from consumer spending, which edged up 0.1% in February and 0.2% in January. The U.S. economy has been on a solid footing as Americans having an optimistic view about the economy with confidence soaring to a more than 16-year high. This is especially true as the Consumer Confidence Index, measured by the Conference Board, jumped to 125.6 in March, the highest level since December 2000.

Solid consumer confidence suggests that spending will strengthen in the months ahead, taking consumer sector higher and giving the economy its regular dose of vitamins. Within this sector, Vanguard Consumer Discretionary ETF VCR is a great pick (read: How Consumer ETFs Crushed the S&P 500 Bull Market Run).

The fund targets the consumer discretionary sector and follows the MSCI U.S. Investable Market Consumer Discretionary 25/50 Index. It holds 378 stocks in its basket with AUM of $2.1 billion. VCR is the low cost choice in the space, charging just 10 bps in annual fees while volume is moderate at nearly 89,000 shares a day. The product gained nearly 14% over the trailing one-year period and has a Zacks ETF Rank of 2.

Proteins: Financial Sector

Like protein, the financial sector, carries out a huge array of functions through its banks and financial institutions. The sector facilitates growth in every part of the country. The stocks in this sector moved up dramatically on hopes of the scaling back of the Dodd-Frank Act, which prevents banks from taking excessive risks, and a rising rate environment. Additionally, stabilizing oil prices are acting as catalysts given that most banks are highly exposed to the energy sector.

That being said, SPDR S&P Regional Banking ETF KRE is the outperformer, having gained over 46% in the last one year. The uptrend is likely to continue given that it has a Zacks ETF Rank of 1 (read: 6 Solid Reasons to Buy Financial ETFs Now).

The fund targets the banking corner of the financial sector and follows the S&P Regional Banks Select Industry Index, holding 102 stocks in its basket. KRE is one of the largest and the most popular ETFs in the banking space with AUM of $3.7 billion and average daily volume of around 7.7 million shares. It charges 35 bps a year in fees.

Minerals: Medical Sector

Just like minerals are important for bone structure in a human body, health care is the backbone of the economy. It is one of the largest and fastest-growing sectors thanks to an aging population, growing middle class, and insatiable demand for new treatments and drugs for many illnesses. About 10% of economic growth comes from this sector.

The industry is clearly benefiting from promising drug launches, cost-cutting efforts, an accelerated pace of innovation, growing importance of biosimilars, expanding insurance coverage, and ever-increasing health care spending. One of the beneficiaries of this trend is BioShares Biotechnology Products Fund BBP with a Zacks Rank #3 (read: Trumpcare Collapse Fuels Rally in Healthcare Stocks & ETFs).

The ETF follows the LifeSci Biotechnology Products Index, which measures the performance of biotechnology companies with a primary product offering that has received the U.S. Food and Drug Administration’s approval. Holding 35 stocks, the product has accumulated AUM of about $37.1 million and charges 86 bps in fees per year. Volume is light trading about 16,000 shares a day. BBP was up 44.5% over the last one-year period.

Carbohydrates: Technology Sector

Similar to carbs that provide energy to the muscles and brain, the technology sector powers the economy with its wide range of products and services including electronics, software, computers and social media. Stronger earnings, compelling valuation, and emergence of new technology such as wearables, VR headsets, drones, and virtual reality devices are driving growth in the sector.

Additionally, the sector is benefiting from the dual tailwinds of a rising interest rate scenario and Trump’s proposed corporate tax reform, which could allow companies to bring back cash held overseas at lower rates. Within the sector, PowerShares Dynamic Semiconductors Fund PSI has emerged strongly, gaining more than 61% over the trailing one-year period.  

This product, with AUM of $221.1 million and average daily volume of around 55,000 shares, follows the Dynamic Semiconductor Intellidex Index, which selects semiconductor stocks on a variety of investment criteria: price momentum, earnings momentum, quality, management action and value. In total, the fund holds a basket of 30 securities. It charges a fee of 63 bps a year and has a Zacks ETF Rank of 1 (read: Buy Hot Tech ETFs to Avoid Trump Uncertainties).

Fats: Construction Sector

Construction sector – accounting for 5.5% of GDP – acts as fats, which provide energy backup to the economy. This is because construction activity picks up when the economy strengthens. U.S. construction spending accelerated to 11-year high in February as growing demand is pushing builders to build more homes, highways and schools. In addition, increased hiring, rise in wages and ongoing job creation will continue to fuel growth in the sector.

To tap this bullish trend, iShares U.S. Home Construction ETF ITB could be an exciting pick. The fund provides a pure play to home construction stocks by tracking the Dow Jones U.S. Select Home Construction Index and holds a basket of 44 stocks. It has amassed $1.4 billion in its asset base and trades in heavy volume of around 2.6 million shares a day on average. It charges 44 bps in annual fees and gained 19.2% in the trailing one-year period. The fund has a Zacks ETF Rank of 1 (read: Best ETFs & Stocks from Top Sectors of Q1).

Water: Transport Sector

Transport acts like water in the economy that enables the movement of freight and passengers through different modes such as rail, trucks, ships, and air. It occupies an important place in the world market and is often considered a barometer of broad economic health. This sector is riding high on U.S. economic recovery and increasing investor confidence.

Solid retail, manufacturing, and labor data act as major tailwinds to broad growth, indicating strong demand for movement of goods across many economic sectors, pushing the transport sector higher. iShares Dow Jones Transportation Average Fund IYT outperformed over the past one year, surging 18.7% and will likely continue its strong performance given its Zacks Rank #1 (read: 5 Top-Ranked Sector ETFs for a Promising Portfolio).

The fund tracks the Dow Jones Transportation Average Index, giving investors exposure to a small basket of 20 securities. It has accumulated nearly $957 million in AUM while sees solid trading volume of more than 371,000 shares a day. It charges 44 bps in annual fees.

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