Summer has officially kicked off and investors can feel the heat in the bourses. This is because summer months (from May end to early September) have been historically weak for the stock markets with sluggish trading volumes.
True to the most popular trading proverb "Sell in May and Go Away" investors feel the lazy summer lull during these months. Most of the investors believe in this old saying and might want to avoid the seasonal decline in the stocks. Additionally, current economic fundamentals have been signaling a huge volatility and uncertainty in the coming months.
This is especially true as a raft of upbeat economic data and an accelerating job market indicate that the world's largest economy is improving after the first-quarter slump. This has raised speculations for the first rate hike since 2006 sometime later in the year. On the other hand, disappointing consumer spending data, weak consumer sentiment in May, and downward revision to the first quarter GDP growth raises questions on the health of the economy.
Further, the U.S. dollar - the major culprit of the revenue weakness in Q1 - resumed its rally in recent weeks while oil price might fall in the days ahead on deteriorating demand/supply trends. Moreover, an aging bull market, lofty stock valuations, as well as the Greek debt drama are weighing on investor sentiment.
In such a backdrop, investors could be well served by looking at the ETFs of the top-performing sectors.
How to Find Top-Performing Sectors
While identifying the top-performing sector is a daunting task, the Zacks Industry Rank makes this process simpler. First, we have to find out the best industries that have earned the top Zacks ranks. 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.
A top Zacks Industry Rank means that 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 up an industry.
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 industry. Lower scores are always better. The industry having a rank of 2.00-2.64 and 2.65-2.81 indicates that these are very attractive and attractive, respectively, and thus the top-performing ones.
Top-Ranked ETFs in Focus
We have found a number of ETFs that have the top Zacks ETF Rank of 1 (Strong Buy) or 2 (Buy) in these top-performing sectors and are thus expected to outperform in the months to come. The trio has enjoyed a strong momentum and is leading the broad market fund (NYSEARCA:SPY) by wide margins from a year-to-date look. As such, these could be excellent picks for summertime as well.
iShares North American Tech-Multimedia Networking ETF (NYSEARCA:IGN)
Computers and technology is the most attractive sector at present with electronics, computer-office equipment, and telecom services leading the way. One interesting way to tap these industries is with IGN, which provides exposure to telecom equipment, data networking and wireless equipment companies.
The fund tracks the S&P North American Technology-Multimedia Networking Index. Holding 23 securities in its basket, it is highly concentrated on its top 10 holdings with 70% of total assets with the largest allocations going to Palo Alto Networks (NYSE:PANW), Juniper Networks (NYSE:JNPR) and Cisco (NASDAQ:CSCO). However, the product has a wide exposure to various market cap levels with 55% in mid caps, 27% in small caps and the rest in large caps.
The fund has accumulated $151.7 million in assets while sees light volume of around 42,000 shares a day. It charges 47 bps in fees per year and has added 7.7% in the year-to-date time frame. The product has a Zacks ETF Rank of 1 with a High risk outlook.
SPDR S&P Health Care Services ETF (NYSEARCA:XHS-OLD)
The health care sector is considered a defensive play as it is unaffected by the economic cycles. While drugs and medical products are expected to perform in line with the market, medical care will be the outperformer in the health care space. As a result, XHS seems to be an interesting pick to play the space.
The fund uses equal weight methodology to each security by tracking the S&P Health Care Services Select Industry Index. Holding 56 stocks in its basket, each security accounts for no more than 2.61% of total assets. Humana (NYSE:HUM), Omnicare (NYSE:OCR) and Select Medical (NYSE:SEM) are the top three holdings in the basket.
From an industry look, health care services, health care facilities, and managed health care collectively make up for 85% share while health care distributors take the remainder. The fund has amassed $177.5 million in its asset base and trades in light volume of around 36,000 shares a day. Expense ratio came in at 0.35%. The ETF has gained about 13.8% so far this year and has a Zacks ETF Rank of 2 with a Medium risk outlook.
PowerShares DWA Consumer Cyclicals Momentum Portfolio (NASDAQ:PEZ)
Consumer discretionary is also expected to outperform with consumer electronics, other consumer discretionary and apparels at the top, followed by media. While there are several options that could provide nice exposure to these industries, PEZ could be an intriguing pick for investors seeking to profit in the dull summer months.
This fund provides exposure to 36 consumer stocks having positive relative strength (momentum) characteristics by tracking the DWA Consumer Cyclicals Technical Leaders Index. It is pretty spread out across securities with none holding more than 6.1% of assets. O'Reilly Automotive (NASDAQ:ORLY), Domino's Pizza (NYSE:DPZ) and Dillard's (NYSE:DDS) are the top three elements.
About 30% of the portfolio is dominated by specialty retail while hotel restaurants and leisure, and textiles apparel and luxury goods round off the top three positions with double-digit exposure each. PEZ is often overlooked by investors as depicted by its AUM of $99.5 million and average daily volume of 24,000 shares. The expense ratio came in at 0.60%. The product is up 4.7% so far this year and has a Zacks ETF Rank of 2 with a Medium risk outlook.