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5 Sector ETFs to Play Now

The S&P 500 is on its way to celebrate the first birthday of its hitting the record high of 2,130.82 on May 21, 2015, but the party mood is apparently missing. The index has definitely pulled itself from the mid-February trough, gaining about 13%. Then again, it lost about 0.9% in the last one month (as of May 12, 2016).

And it has reasons for such underperformance. After all, it has been hit by lackluster corporate results from some tech and retail bellwethers and subdued banking earnings this season. Investors should note that as per the Zacks Earnings Trend issued on May 4, 2016, the growth picture is appalling with the S&P 500 likely to suffer a 7.1% decline in earnings in Q1 on 1.1% lower revenues. To add to this, global growth worries is a real pain in the neck.

But a full-blown earnings recession does not mean that there is no area to invest in the market. There are actually a few sectors which could be in fine fettle. Some of these may gain on their inherent strength and some may be the beneficiaries of their low risk nature. As per the Zacks Market Strategy issued on May 6, 2016, most of the following sectors fall under the attractive to very attractive category.

Consumer Staples

The consumer staples sector is defensive in nature and works wonders in turbulent times like the one we are witnessing now. With the Fed being dovish and Treasury bond yields at muted levels, the lure for low-risk, but high dividend sector is ought to be higher.

Though the sector is overvalued now after delivering solid returns so far this year, it still promises more to those who want to ride this surging sector  a little further. Though Vanguard Consumer Staples ETF (VDC) has a Zacks ETF Rank #3 (Hold), it can be targeted for some more gains. VDC yielded about 2.89% as of May 12, 2016 (see all consumer staples ETFs here).

Health Care

The health care sector has been an underperformer this year, but may turn around on compelling valuation. The overall medical sector is likely to record a 7% gain in earnings in the first quarter of 2016 on 9% growth in revenues (read: Follow J.P. Morgan with These Sector ETFs).

We suggest buying SPDR S&P Health Care Services ETF (XHS). The fund puts 35.4% weight in health care services, 31.5% in health care facilities and 18.9% in managed health care and the rest in health care distributions.

Construction

The housing sector appears to be in great shape as evident by the recent volley of decent data points and upbeat earnings. Also, the U.S. manufacturing sector stepped into the growth path in recent months, albeit sluggishly. Notably, construction spending in the U.S. grew to an 8-1/2-year high in March.

This trend can be played by investing in the Zacks Rank #2 (Buy) construction ETF PowerShares Dynamic Building & Construction ETF (PKB) (read: Manufacturing Churns Out Slow Growth in US--ETFs in Focus).

Telecom

The telecom industry may come up with just average earnings, but the pricing trend seen so far this year is extraordinary. The attraction of high-yield has probably given this sector a boost. Investors can bet on Vanguard Telecommunication Services ETF (VOX), which yielded 3.79% as of May 12 and has a Zacks ETF Rank #3.

Materials

By now, investors must be familiar with the impressive run of materials ETFs this year as most products are in the green. Within the set, miners have displayed a strong trend and may see further upside if the greenback stays calm and the global market upheaval continues to pull the strings (read: Forget Gold; Buy Silver Mining ETFs Instead).

Investors should note that about 85% of the basic materials’ companies under the S&P 500 have reported as of May 4, 2016. Of this, as much as 82.4% beat on earnings while 52.9% surpassed revenues estimates. This is a moderately upbeat performance if we compare with the other sectors.

Among the many ETFs related to the sector, Silver Miners ETF (SIL) and Guggenheim Timber ETF (CUT) are worth a watch. While silver miners may gain if industrial activities are on the rise (the metal has considerable application in industrial activities), timber ETFs should benefit from a housing market recovery. This is because the rise in housing construction is associated with higher demand for wood (read: The Best ETFs for the Housing Recovery?).

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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
 
VIPERS-CONS STA (VDC): ETF Research Reports
 
SPDR-SP HLTH CR (XHS): ETF Research Reports
 
PWRSH-DYN BLDG (PKB): ETF Research Reports
 
VIPERS-TELE SVC (VOX): ETF Research Reports
 
GUGG-TIMBER (CUT): ETF Research Reports
 
GLBL-X SILVER (SIL): ETF Research Reports
 
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