Time For These Top-Rated Cyclical ETFs?

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Includes: KBWR, PTF, RTH
by: Zacks Funds

The markets have been lukewarm lately as participants are holding their breath to study every bit of the Fed-related news. No doubt, signs of a snap-back are pretty much there in the U.S. economy, but the recoil is not flawless and the global market volatility ticked up to a delirious level, thanks mainly to the China issues.

Also, previous remarks by the Fed have only added to the uncertainty as the central bank sought more improvement in the labor market and inflation backdrop. The U.S. economy underwent an upward GDP revision for the second quarter of 2015, from 2.3% reported earlier to 3.7% upgraded later on strong domestic demand. If this was not enough, the unemployment rate dropped to 5.1% in August, the lowest since April 2008.

While this more-than-seven-year low unemployment rate should bolster the case for an imminent policy tightening, a still-muted inflation backdrop backed by an oil price slump, lackluster wage gains, a missed job expectation in August and a feeble overseas market are blurring the optimism. All these have put this week's Fed meeting in the high-alert zone.

Cyclicality of Sectors

Whatever the case, no one can deny the growth in the American economy given the solid housing data, improved confidence among citizens and decent recovery (if not brisk) in several cyclical sectors like retail. Added to this, historically cyclical sectors outperform the defensive ones when the rates normalize.

These areas often slump when the economy is tumbling, but are among the biggest winners when the economic environment turns favorable. Among the cyclical ones, as per Fidelity, sectors like consumer discretionary and financials and economically sensitive sectors like industrials and information technology tend to do better in the early cycle of the an economic recovery.

Fidelity defines an early cycle phase when economic activity revives, credit starts to grow, policy is still accommodative and sales and profits improve. With many of these conditions present in the U.S. economy, we can conclusively say that the coming months will be fairly dominated by the cyclical sectors.

If the Fed at all hikes rates this month, it should not be more than just 25 bps; otherwise, investors might see the timeline shifting to the end of the year. In either of the case, a few cyclical sectors and the related ETFs are expected to perform impressively especially given the expected earnings growth trend. For these investors, we highlight three ETF picks below that have heavy exposure to the cyclical industries:

Market Vectors Retail ETF (NYSEARCA:RTH)

The retail sector can best reflect the lift in an economy as it revolves around discretionary purchases. Though the August Retail Sales report was mixed, with the 'headline' growth rate falling short of estimates, its internals exhibited improved momentum and the prior-month's numbers were revised higher.

The sector is expected to post earnings growth of 0.4% and 6.4% in Q3 and Q4 of this year, respectively, both better than consumer discretionary sectors. Its sales expectation is also steady at 3.5% for Q3 and 7.1% for Q4, again better than consumer discretionary. More jobs and cheaper fuel should help the sector to grow.

This retail fund has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook. The fund has added over 5.7% so far this year.

PowerShares DWA Technology Momentum ETF (NASDAQ:PTF)

The technology sector saw certain setbacks this year as the stocks were crushed during the market correction in August. The sector went into a tailspin on acute sell-offs in tech biggies like Apple (NASDAQ:AAPL), Goggle (NASDAQ:GOOG) (NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT) and IBM (NYSE:IBM). However, the nightmare should soon be over, as the sector is expected to register a 2.8% earnings growth in Q3 and an 8.8% jump in revenues.

This technology ETF currently has a Zacks Rank #2 (Buy) and has advanced 5.1% in the year-to-date frame (as of September 15, 2015).

PowerShares KBW Regional Banking Portfolio (NASDAQ:KBWR)

This regional banking sector has benefited greatly from approaching Fed policy normalization. The space boasts solid Zacks Ranks. In any case, U.S. banks reported solid earnings this season with 11.6% growth in earnings on 0.6% decline in revenues. Banks recorded 66.7% beat on earnings on 60% top-line beat.

Overall the financial sector is expected to deliver stellar earnings growth of 8.6% and 15.1% in Q3 and Q4, respectively. Very few sectors are able to attain this envious growth rate, especially given the even-increasing global growth. However, there will be no expansion in revenues.

Regional banking ETF (KBWR) is up 3.8% so far this year and has a Zacks ETF Rank #2 with a High risk outlook.

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