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What Rising Rates? Play These Cyclical ETFs

Sanghamitra Saha
Commodity prices risk along with stiff competition and risk from adverse foreign currency translations are likely to hurt 3M Company's (MMM) financials in first-quarter 2018.

Signs of a recovery, albeit moderate, in the U.S. economy, are now evident thanks to a solid labor market, manufacturing activity and housing data points. Improving wage gains, decent-though-not-great inflation, moderate retail sales, Trump bump, the passing of the tax reform and last but not the least uptick in global growth translated into a super summer American market rally.

Definitely such new-found optimism about the U.S. economy triggered talks on the speed of Fed policy tightening all over again. Many fear that stocks may also slip due to the fear of gradual creases in cheap dollar inflows. But, in reality, this may not happen.

Though bond yields rose to start 2018 and many Fed officials delivered hawkish comments lately, investors should note that the Fed is tightening policies to reflect a growing economy. As of Jan 9, 2018, the yield on the benchmark 10-year Treasury note was 2.55% while the year started with a benchmark bond yield of 2.46%.

Wealth Effect in Play?

The S&P 500 has rallied 1.9% so far this year (as of Jan 10, 2018). A $60-oil and a flurry of strong economic data points pushed the index higher. In any case, the index returned more than 20% in the last one year. If this ascent is maintained, a wealth effect can be realized.

As per investopedia,the wealth effect helps to power economies during bull markets. Big gains in people's portfolios can make them feel more secure about their wealth and their spending.”

And in a growing economy, most sectors surge from a wealth effect, with a few of the more cyclical corners making the most of this run-up. These industries often sag in a slumping economy, but are the biggest winners when rays of hope are seen.

Technology

The technology sector is on a tear lately. Emerging new technologies like cloud computing, big data and Internet of Things are expected to pull the sector forward in the coming days. So, investors can definitely play Zacks Rank #2 (Buy) Technology Select Sector SPDR Fund XLK (read: How to Invest in the Hottest Technologies With ETFs).

Consumer Discretionary

A small-cap consumer discretionary ETF can be considered a barometer of rising income levels of consumers of an economy. These pint-sized stocks do not have much exposure in foreign lands and are thus unaffected by the dollar strength. Plus, small-cap stocks are likely to benefit the most from the tax reform, PowerShares S&P SmallCap Consumer Discretionary Portfolio PSCD. With American consumer spending being high, a bet on this fund is warranted (read: Holiday Sales At 6-Year High: Best Consumer ETFs & Stocks).

Industrials

As per Fidelity, sectors like industrials do better in the mid-cycle phase of the economy. In any case, an industrial boom is apparent in the U.S. economy due to the narrowing wage differential between developed and emerging economies, moderate strengthening of the U.S. dollar against a basket of emerging currencies and relatively low energy prices in the United States. Still-low borrowing costs and likely tax cuts are also shoring up the sector. Industrials/Producer Durables AlphaDEX Fund FXR,a Zacks Rank #2 (Buy), could thus be a great pick.

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