The rally that the U.S. stock market greeted the New Year with seems to be fizzling out, thanks to Trump's first press conference that dampened investor optimism. So, the same old story of volatility and uncertainty is being written all over again for 2017.
The U.S. economy is clearly on a solid footing, buoyed by an impressive labor market, rising wages, slowly rising inflation and increasing consumer spending. Americans have an optimistic view about the economy, with confidence hitting the highest level in 12 years. Additionally, the combination of other factors, like return to the earnings growth era, pro-growth policy, the jump in oil price and the rise in interest rates, have added to the strength.
Nevertheless, skepticism about Trump's ability to keep his promises, the possibility of a trade war, geopolitical tensions, volatility in oil price, a strong dollar and global growth concerns would continue to weigh on investor sentiment.
Given this, investors could be well served by looking at the ETFs and stocks of the top-ranked 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 each stock in the industry and then assigning a rank to it. So first, we selected the best industries that have a top Zacks Rank.
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 (see all the Top Ranked ETFs).
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. Industries with ranks of 2.00-2.64 and 2.65-2.81 are very attractive and attractive, respectively, and are thus the top-performing ones.
Financials is the most attractive sector at present, with INVEST BKRS-MGRS, BANKS & THRIFTS and BANKS-MAJOR leading the way. This is because these are backed by the dual tailwinds of Trump's policies and a rising rate environment. Trump seeks to deregulate the industry and dismantle the Dodd-Frank Act, which was enacted in the aftermath of the financial crisis and crimped some of the business lines of banks, while the central bank has signaled for a faster pace of rate increase this year.
SPDR S&P Regional Banking ETF (NYSEARCA:KRE): The fund appears the top pick of this trend. This is one of largest and the most popular ETFs in the banking space with AUM of $3.5 billion and average daily volume of 6.4 million shares a day. It tracks the S&P Regional Banks Select Industry Index. Holding 101 securities in its basket, the fund is widely spread out across various components, with none holding more than 3.7%. It charges 35 bps a year in fees and has a Zacks ETF Rank of 1 or "Strong Buy" rating with a High risk outlook.
Fifth Street Asset Management Inc. (OTC:FSAM): This Zacks Rank #2 (Buy) company is an alternative asset manager that provides flexible financing solutions to small and mid-sized companies. It saw positive earnings estimate revisions of 13 cents for 2017 over the past 90 days and has an above-average growth rate of 5.63%. The stock has a VGM Style Score of A.
The materials sector got a bump from rebounding commodity prices, positive developments in China, a pick-up in global manufacturing activities and improving worldwide trends. Additionally, Trump's pro-growth policies to revive U.S. manufacturing and rehabilitate the country's aging infrastructure have added to its strength. Steel and METALS-NON FERROUS are the most attractive sectors at present, followed by agribusiness.
PowerShares S&P SmallCap Materials Portfolio ETF (NASDAQ:PSCM): This is a small cap-centric fund that tracks the S&P SmallCap 600 Capped Materials Index. It holds 38 securities in its basket, with each having less than 7.4% share. In terms of industrial exposure, chemicals dominates half of the portfolio, while metals & mining and paper & forest products round off the next two spots with 23.6% and 20.2%, respectively. The ETF has accumulated $99.5 million in its asset base and has an expense ratio of 0.29%. Volume is low, with 22,000 shares exchanged a day on average. It has a Zacks ETF Rank of 1 with a High risk outlook.
AK Steel Holding Corp. (NYSE:AKS): This Zacks Rank #1 company is a leading producer of flat-rolled carbon, stainless, electrical steel products and stainless tubular steel products that are used in automotive, appliance, construction and manufacturing markets. It saw solid earnings estimate revision of 52 cents for 2017 over the past 90 days. This represents a whopping growth rate of 216.60%. The stock has a VGM Style Score of A.
The industrial sector has been on tear on a recovering manufacturing industry and a push from manufacturing reshoring. This trend is likely to continue under the Trump presidency because he has pledged to cut taxes, boost fiscal spending and be stricter about outsourcing. These should provide a boost to industrial stocks. He is highly expected to bring the lost U.S. manufacturing jobs back to the country. As such, MACHINERY-ELECTRICAL falls in the most attractive industry and is expected to continue outperforming, followed by pollution control and machinery.
First Trust RBA American Industrial Renaissance ETF (NASDAQ:AIRR): The ETF offers exposure to the small- and mid-cap securities in the industrial and community banking sectors by tracking the Richard Bernstein Advisors American Industrial Renaissance Index. Holding 43 stocks in its basket, the fund is well spread across components, with none holding more than 3.65% share. In terms of industrial exposure, engineering and construction and industrial engineering take the top two spots with a combined 59% of the portfolio. The product has $144.2 million in AUM and trades in a moderate volume of around 70,000 shares per day, on average. It charges 70 bps in fees and expenses and has a Zacks ETF Rank of 2 with a High risk outlook.
Nordson Corporation (NASDAQ:NDSN): This Zacks Rank #2 company is one of the world's leading producers of precision dispensing equipment that applies adhesives, sealants and coatings to a broad range of consumer and industrial products during manufacturing operations. The stock saw an impressive earnings estimate revision of 13 cents for the year (ending October 2017) over the past 90 days and is expected to grow at a solid rate of 6.79%. The stock has a VGM Style Score of B.
The technology sector is also expected to outperform, with MISC TECHNOLOGY at the top, followed by ELECTRONIC-SEMICONDUCTORS and COMPUTER SOFTWARE-SERVICES. A rising rate environment is highly beneficial for technology, as are improving industry fundamentals, ongoing consolidations and emerging technologies.
Vanguard Information Technology ETF (NYSEARCA:VGT): This fund provides exposure to a large basket of 373 technology stocks by tracking the MSCI US Investable Market Information Technology 25/50 Index. It is highly concentrated on the top three firms, collectively accounting for 33% share, while other firms hold no more than 5.7% of assets. The product is well spread out across a number of sectors, with Internet software & services, technology hardware & storage, system software, semiconductors and data processing & outsourced services accounting for a double-digit allocation each. It manages about $10.3 billion in its asset base and has 0.10% in expense ratio. Volume is good at nearly 420,000 shares. The fund has a Zacks ETF Rank of 2 with a Medium risk outlook.
Broadcom Limited (NASDAQ:AVGO): This Zacks Rank #1 company designs, develops and supplies a range of complex digital and mixed signal complementary metal oxide semiconductor-based devices and analog III-V based products worldwide. The stock saw a solid earnings estimate revision of 70 cents for the fiscal year (ending October 2017) over the past 90 days, with an expected earnings growth rate of 23.72%. The stock has a VGM Style Score of B.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.