Amid heightened volatility and uncertainty, the Wall Street bourses logged their biggest weekly gains of 2016. The S&P 500 and Dow Jones Industrial Average climbed 2.8% and 2.6%, respectively, while the Nasdaq Composite Index outperformed with 4% gains last week.
The impressive gains came as fears of recession in the U.S. receded with a slew of encouraging retail sales data, consumer spending, producer prices, factory production, inflation and weekly jobless claim. This reflects that the U.S. economy is regaining momentum after a sluggish fourth quarter and could influence the interest rate policy of the Fed, which hinted at a delay in the March rate hike plan in its latest minutes.
Additionally, oil price bounced back from its multi-year lows and the Chinese economy seems to be stabilizing, with no further devaluation seen in its currency, yuan. Further, hopes of stimulus from the central banks in Europe and Japan sparked off another rally last week. Encouraged by these positive developments, investors indulged in bargain hunting. This was supported by sharp declines in most stocks that made their valuations extremely cheap.
However, oil price volatility, uncertainty in the Fed policy, the ongoing China turmoil and sluggishness in emerging markets are weighing on investor sentiment. In such a backdrop, investors could be well served by looking at the ETFs and stocks of the top-performing sectors.
How to Find the Top-Performing Sectors
While identifying the top-performing sector is a daunting task, the Zacks Industry Rank makes this process simpler. The Zacks Industry Rank is determined by calculating the average Zacks Rank for all the stocks in the industry and then assigning a rank to it. So first we selected the best industries, that have the top Zacks ranks.
A top Zacks Industry Rank means more stocks within that group are seeing upward earnings estimate revisions. Since an industry is a group of stocks in a similar business, this is the perfect way to size it up (read: all the Top Ranked ETFs here).
The Zacks Industry classification divides the business world into 16 sectors comprising 60 medium or M-level industries and 260 plus or X-level industries. We rank all 260 plus X-level industries based on the earnings outlook of the constituent companies in each. Lower scores are always better. Industry having a rank of 2.00-2.64 and 2.65-2.81 are very attractive and attractive, respectively, and are thus the top-performing ones.
After a wild ride this year on a huge sell-off of the high-growth industries - Internet and software - the technology sector looks cheap at the current levels, trading at P/E of 14.2 versus 15 of the S&P 500. Miscellaneous technology is the most attractive sector at present, followed by electronics and computer software.
First Trust Tech AlphaDEX ETF (NYSEARCA:FXL): This ETF follows the StrataQuant Technology Index, which uses the AlphaDEX methodology to select stocks from the Russell 1000 Index and ranks them on both growth and value factors. The approach results in a basket of 80 securities, which are widely spread out across components, with none holding more than 2.85% of assets. In terms of industrial exposure, software takes the top spot with one-fourth share, followed by 18.7% in electronic equipment, instruments and components. The fund has accumulated $560.5 million in AUM and sees a good trading volume of about 262,000 shares a day. It charges 63 bps in fees per year and has lost 10% so far this year. The product has a Zacks ETF Rank of 1 or "Strong Buy" rating with a High risk outlook.
Broadcom Limited (NASDAQ:AVGO): This Zacks Rank #2 (Buy) company is a leading provider of advanced electronics manufacturing services to original equipment manufacturers (OEMs) primarily in the telecommunications and networking, consumer electronics and computer industries. It saw positive earnings estimate revisions of 10 cents for fiscal 2016 over the past 30 days, with an expected growth rate of 10.21%. The stock has a superb Value and Growth Style Score of "B" each.
The oil price collapse, quite strangely though, has hit alternative energy stocks. But some interesting industry trends like increased investments in renewable energy, the historic Paris climate deal and the U.S. tax credit extension should bring back momentum when the global headwinds subside and give a solid boost to the solar and wind stocks.
First Trust NASDAQ Clean Edge Green Energy Index ETF (NASDAQ:QCLN): This fund provides exposure to the U.S. clean energy companies across a wide range of industries, including solar power, biofuels, advanced batteries, as well as the installation of new technological systems. It tracks the Nasdaq Clean Edge Green Energy Index and manages assets worth $65.5 million. It charges 60 bps in fees per year, while volume is light at nearly 24,000 shares. In total, the product holds 45 securities, with the top five firms dominating the returns at 34% share. From a sector look, technology accounts for nearly 30.1% of the assets, while oil & gas, utilities and industrials take double-digit exposure each. QCLN has lost 16.4% so far this year and has a Zacks ETF Rank of 3 (Hold) with a High risk outlook.
SolarEdge Technologies Inc. (NASDAQ:SEDG): This Zacks Rank #1 company is a designer, developer, manufacturer and seller of direct current optimized inverter systems for solar photovoltaic (PV) installations in Israel, Europe, the United States and internationally. It saw solid earnings estimate revision of 15 cents for fiscal 2016 over the past 30 days. This represents a whopping growth rate of 106.19%. The stock has a solid Growth and Momentum Style Score of "B" each.
While a strong dollar is eating away the profits of big transporters, the sector remains the biggest beneficiary of cheaper oil prices along with increasing consumer confidence and spending, especially the airlines. As per the International Air Transport Association (IATA), global airlines are expected to generate a record profit of $36.3 billion this year, up from $33 billion in 2015. Additionally, the airline industry boasts a superb Zacks Industry Rank of 2.31.
U.S. Global Jets ETF (NYSEARCA:JETS): This fund provides exposure to the global airline industry, including airline operators and manufacturers from all over the world, by tracking the U.S. Global Jets Index. In total, the product holds 33 securities, with heavy concentration on the top four firms at 47.5%. It has gathered $48.3 million in its asset base, while it sees lower trading volume of nearly 45,000 shares a day. It charges investors 60 bps in annual fees and has lost 6.7% in the year to date time frame.
Alaska Air Group, Inc. (NYSE:ALK): This Zacks Rank #2 company provides passenger and cargo air transportation services primarily in the United States. It saw positive earnings estimate revisions of 12 cents over the past one month, with an expected growth rate of 16.37% for this year. The stock has a solid Value, Growth and Momentum Style Score of "A" each.
The healthcare sector is considered a defensive play, as it is unaffected by economic cycles and market turbulence. In particular, medical care is expected to be an outperformer, while drugs and medical products are market performers.
SPDR S&P Health Care Services ETF (NYSEARCA:XHS): The fund uses an equal weight methodology to each security by tracking the S&P Health Care Services Select Industry Index. Holding 58 stocks in its basket, each security accounts for no more than 2.55% of total assets. From an industry look, healthcare services, healthcare facilities and managed healthcare collectively make up for 83.8% share, while healthcare distributors take the remainder. The fund has amassed $159.1 million in its asset base and trades in a light volume of around 40,000 shares a day. The expense ratio came in at 0.35%. The ETF has shed about 11.8% so far this year and has a Zacks ETF Rank of 1 with a Medium risk outlook.
HCA Holdings, Inc. (NYSE:HCA): This Zacks Rank #1 company is a leading provider of healthcare services in the United States. It saw solid earnings estimate revision of 45 cents over the past 30 days for the current year, which represents earnings growth of 12.30%. The stock has a solid Value and Growth Style Score of "A" each.