Four hot ETFs investors won’t want to miss

Many investors are bracing for a more-volatile stock market this year as interest rates, inflation, the pandemic, geopolitical tensions, oil and supply-chain bottlenecks continue to cause uncertainty.

But those challenges also could give rise to opportunities in exchange-traded funds focused on specific sectors, some financial pros say.

More than $100bn flowed into equity sector ETFs in 2021, up from $70bn in 2020, according to data from Morningstar. There are now 494 such funds with a combined $806bn in assets, up from 370 equity sector ETFs with combined assets of $346bn in 2016.

“One of the big investment consequences of the pandemic is that people are looking for more targeted exposures, either within sectors or across sectors,” says Jay Jacobs, senior vice president and head of research and strategy at Global X ETFs.

When evaluating sector ETFs, “investors should look at a fund’s top 10 holdings to determine its purity within a sector or theme, and its expense ratio to determine its cost,” says Jeff Spiegel, US head of BlackRock’s iShares Megatrend, International and Sector ETFs. Investors also should look for funds that focus on companies with “higher-quality, high-yielding equities since there are so many risks swirling about in the marketplace,” says Sam Stovall, chief investment strategist at research firm CFRA.

So which sectors are most likely to benefit from the confluence of factors shaking up the economy?

Here are four sectors that research analysts predict will be hot and that have high earnings-per-share growth forecasts for 2022, according to consensus estimates from S&P Global Market Intelligence.

1. Movies and entertainment

This industry has one of the highest growth expectations for 2022, with analysts expecting per-share earnings to rise 57.5% from last year, according to S&P Global data as of Dec. 31. The industry hit a low point in the US in 2020 with the closing of movie theatres amid the pandemic and lockdowns. But box-office revenue is poised to recover, according to PricewaterhouseCoopers, which is predicting a 37.3% compound annual growth rate for revenue through 2025.

“The combination of the reopening of movie theatres and demand for streaming entertainment is fuelling a resurgence,” says Stovall.

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Among funds in this sector is Communication Services Select Sector SPDR, which has about $14bn in assets and top holdings in companies such as Facebook parent Meta Platforms, Google parent Alphabet, AT&T, Netflix and Walt Disney. The fund, which returned 16% in 2021, has an expense ratio of 0.12%.

Downside risk: Earnings growth could stall if the Omicron variant of Covid-19 continues to flare up in the US, delaying consumers’ willingness to go to movie theatres. A slowdown in subscribers for streaming content also would hurt providers. The churn rate for subscribers of video-on-demand services in 2022 is predicted to be 30% worldwide, according to Deloitte.

2. Aerospace and defence

This sector’s per-share earnings are expected to grow 25.2% in 2022, according to analysts’ consensus estimates. All areas of this market are poised for growth, according to Deloitte’s ” 2022 Aerospace and Defense Industry Outlook.”

“Some of the most exciting things to watch in 2022 are in space flight, efforts to decarbonise the aviation industry, airport infrastructure development and the emergence of vertical lift aircraft [those that can depart, hover and land vertically],” says John Coykendall, global aerospace and defence leader for Deloitte.

Last month, President Biden signed the National Defense Authorisation Act into law, authorising a 5% increase in military spending to $768bn. And while the latest Omicron variant will challenge travel in the short term, Deloitte says it believes that both domestic and international travel will continue to recover over the course of 2022. That will boost demand for commercial aircraft.

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Funds focused on this sector include iShares US Aerospace & Defense, which has about $2.5bn in net assets and top holdings in Raytheon Technologies, Boeing, Lockheed Martin, Northrop Grumman and General Dynamics. It returned 9.4% in 2021 and has an expense ratio of 0.42%.

Downside risk: The No. 1 concern is that the Omicron surge could trigger lockdowns and slow air traffic recovery. Continued supply-chain bottlenecks and semiconductor and electronic shortages could also hurt manufacturers and the aftermarket. The labour shortage is another risk factor.

3. Online retail

Analysts are predicting earnings growth of 25.9% for the internet and direct-marketing retail sector. Research firm eMarketer sees US e-commerce sales rising to almost $1.2tn by 2023, accounting for 19% of all US retail sales, from $909bn, or 15.5% of all sales, in 2021.

“We believe online shopping will continue to be a driving force and expand,” says Todd Rosenbluth, head of ETF and mutual-fund research at CFRA.

Last year, the threat of higher interest rates caused investors to lock in profits in areas such as consumer discretionary and technology, says CFRAs Stovall. But EPS growth for 2022, combined with still relatively low interest rates, should reignite interest in sectors with strong growth prospects, he says.

ProShares Online Retail has about $620m in net assets. Its top holdings are in, Alibaba Group Holding, eBay and DoorDash. The fund, which was down 25% in 2021, has an expense ratio of 0.58%.

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Downside risk: Amazon is the 800-pound gorilla in online retail. Antitrust bills have been introduced in Congress targeting Amazon and Big Tech for their market dominance. If any pass this year, this industry titan could stumble, and that could hurt online retail stocks, equity analysts say.

4. Oil-and-gas exploration and production

Oil-and-gas exploration is forecast to increase this year, and the sector is expected to post 39% earnings growth. Surging domestic and global demand above pre-pandemic levels should benefit the industry, analysts say. Hurricane Ida damaged US offshore oil-and-gas production and companies are now rushing to put facilities back online as natural gas and oil prices soar. In November, President Biden tapped the nation’s strategic oil reserves to alleviate supply concerns.

“We think the market has been overestimating the long-term decline in demand for oil and petroleum products and this sector offers investment opportunities this year especially in oil-field services, exploration and production,” says Dave Sekera, Morningstar’s chief US market strategist.

Stewart Glickman, CFRA’s energy equity analyst, predicts that companies such as Exxon Mobil, Chevron and Pioneer Natural Resources “will spend 15% to 17% more on exploration and development in 2022.”

Among ETFs, iShares US Oil & Gas Exploration & Production has more than $320m in net assets and tracks the Dow Jones US Select Oil Exploration and Production Index. Its top holdings include Conoco Phillips, EOG Resources and Pioneer. The ETF surged 76% last year. It has an expense ratio of 0.42%.

Downside risk: Another Covid-related relapse could slow the economy, reducing energy demand. OPEC could also lose its supply discipline and start producing too many barrels a day above its production targets, weakening oil prices.

Lori Ioannou is a writer in New York. She can be reached at [email protected].

This article was published by Dow Jones Newswires

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