Bull Market Ahead? Buy These ETFs

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Includes: CFGE, DIA, RPG, VIG
by: Zacks Funds

The investing world is strongly mulling over an advanced earnings recession for Q1 and a quivering rally in the S&P 500 that has suffered occasionally this year, shaking investors' confidence. In fact, this key U.S. index is peeping into the negative territory at the time of writing with the year-to-date (as of April 11, 2016) loss being 0.1% (read: S&P 500 Again Shows Weakness: Go Short with These ETFs).

But does this mean that the S&P 500 will move this stealthily for the rest of this year? Probably not. We'll tell you why.

Agreed, cautious sentiments are prevalent lately especially after Goldman Sachs indicated that the S&P 500 will leave 2016 just 3% above the current level, and the near-term outlook of the broader market is even glummer given the expected downbeat earnings for Q1.

Still, there is a group of analysts like Sean Darby, Jefferies' Chief Global Equity Strategist, who remains hopeful of a market rebound this year. The key criterion behind this bullishness is that "the bad news is largely behind us". Even Deutsche Bank is also believer of this fact.

Let's tell you what our Zacks numbers say:

The earnings of the S&P 500 index is likely to decline 10.9% in the first quarter of 2016 while revenues are expected to fall 2.2% as per the Zacks Earnings Trends issued on April 7, 2016. But the trend looks up from the second quarter itself (read: Earnings Recession Put These ETFs in Focus).

Earnings and revenue expectations are projected to fall 5.5% and 2.2% respectively in the second quarter of 2016. Things will enter the positive territory from the third quarter with estimated earnings and revenue growth being 2.6% and 1.2% while the final quarter of 2016 will see earnings and revenue growth of 8.1% and 4.1% respectively.

Behind the Optimism

An expected rebound in oil price and an about 8-month low U.S. dollar which is expected to remain benign in the coming days also thanks to a dovish Fed, should propel investors' risk-appetite. Lower long-term bond yields despite a flurry of upbeat U.S. economic releases in the field of manufacturing, housing and job market should favor the stocks ahead.

Plus, global growth worries - the key hindrance to U.S. stocks - seem to be abating with manufacturing activity picking up in many zones. Ultra-loose monetary policies in various developed economies should finally bear some fruit. Several emerging markets also look stable thanks to a commodity market rebound.

S&P 500 Year-end Target

As per the Zacks Market Strategy issued on April 8, 2016, "the S&P 500 can finish 2016 above 2200, which is a +5% return". The report also tells that a "5.0% unemployment rate in the U.S. adds consumer momentum via pending wage pressure."

The Zacks Market Strategy indicates that the S&P 500 has returned to the valuation seen before the summer 2015 sell-off. Zacks strategists project S&P 500 at 2,200 to 2,300 by year-end, given a 15% chance of U.S. recession.

ETFs to Consider

All in all, the scenario building ahead is not that gloomy, absent any sudden shock from foreign shores. Investors can use the dip in the U.S. dollar by investing in large-cap ETFs as large-cap stocks have considerable exposure in foreign lands and thus get beaten in a rising dollar environment. Below we highlight four large-cap ETFs.

SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA) - Zacks Rank #1 (Strong Buy)

The fund looks to track the Dow Jones Industrial Average and holds 31 securities. The $12.2-billion fund charges 17 bps in fees. The product yields about 2.38% annually (as of April 11, 2016).

Vanguard Dividend Appreciation ETF (NYSEARCA:VIG) - Zacks Rank #1

The fund consists of common stocks of companies that have a record of increasing dividend over time. This is best suited for those who intend to be part of the stock market but still fear volatility and seek quality exposure. The $20.5-billion ETF charges 10 bps in fees. The 178-stock fund is heavy on consumer goods and industrial sectors. VIG yields 2.19% annually.

Guggenheim S&P 500 Pure Growth ETF (NYSEARCA:RPG) - Zacks Rank #2 (Buy)

This choice is for gutsy investors. The fund contains only those S&P 500 companies that have strong growth characteristics. The $1.91-billion fund invests in 118 stocks with double-digit weights in the IT (27.8%) and Consumer Discretionary (24.5%) sectors. No single stock accounts for more than 1.97% of the basket. RPG offers a paltry yield of 0.86% annually.

Calamos Focus Growth ETF (NASDAQ:CFGE)

The actively-managed fund gives exposure to a U.S. equity portfolio targeted at the large market capitalization level. Google (NASDAQ:GOOG), Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) are currently the top three holdings of the fund. However, the product has considerable concentration risk with Google accounting for as much as 7.02%, while the other two account for 6.78% (Apple) and 5.07% (Microsoft) of the portfolio.

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