The signs are all there. U.S. GDP in the first quarter rose, the joblessness situation is slowly improving, consumers are coming out to spend more and homebuilders are feeling more bullish than they have in awhile. That just leaves one thing: which exchange traded funds will give you exposure to our recovery?
The data for the U.S. economic recovery has been favorable: GDP rose 3.2% in the first quarter, jobless claims are down almost 27% year-over-year and the total number of people collecting unemployment benefits is also declining, comments Kevin Grewal for TheStreet. Additionally, March new home sales jumped 27%, orders for non-transportation durable goods are up and first-quarter corporate earnings were better-than-expected. The International Monetary Fund (IMF) has revised upward its forecast for U.S. 2010 GDP growth to 3.1%.
Despite impressive first-quarter earnings, equities still remain cheap. The S&P 500 index is only trading at a price-to-earnings ratio of around 14, its lowest P/E ratio in the last 20 years. Grewal has noted four sectors that are more sensitive to changes in the overall economy and are likely to grow with a recovering economy, and we’ve added in some of our own ideas, as well:
- Transportation. A better economy means more goods are shipped, traveling increases and consumers will want to purchase new vehicles. The iShares Dow Jones Transportation Average (IYT) is a play on this cyclical sector, providing exposure to package carriers, freight carriers and airliners.
- Industrials. Demand for durable goods will likely increase and the Industrial Select Sector SPDR (XLI) is a good way to gain exposure to the manufacturing sector. [Top ETFs to Play The Growing Industrial Activity.]
- Construction. An expanding economy generally means more business for construction companies as consumers seek new housing. Furthermore, the government is throwing billions into the sector for infrastructure projects. The PowerShares DB Building & Construction (PKB) includes construction services companies, building materials companies and isn’t solely focused on homebuilders.
- Consumer Discretionary. Consumers spend more during better economic times, which is one of the reasons why corporate sales have been looking good lately. The Consumer Discretionary Select Sector SPDR (XLY) is one play on the sector. [Wholesale Inventory Gains Give ETFs an Early Leg Up.]
- Metals. Industrial metals are especially well-positioned to benefit in a recovery. Silver, copper, steel, platinum, palladium – they all have varied and wide-ranging uses. As the economy gets better, expect that many builders will be using these metals to install pipes, wires and more. SPDR S&P Metals & Mining (XME) will give you exposure to the companies that produce some of these metals.
These are just a few ideas, but look around – there are hundreds of ETFs and dozens of ways to play the economic rebound. Exploring these sectors should get you started.
Disclosure: Tom Lydon’s clients own shares of XME.
Max Chen contributed to this article.