ETF Areas to Consider for Rotating Out of Tech in 2022
Let's look at some ETF areas that investors can consider for playing the rotation trade out of growth-focused areas into value and cyclical trades.
Wall Street has had a disappointing start to 2022 as benchmark 10-year Treasury yields continue to rise. The S&P 500 Index declined continuously for four days for the first time since September in the last week ending Jan 7. Moreover, the Nasdaq Composite also witnessed a four-day losing streak in the first trading week of the year.
The reason for this market slowdown can essentially be the soaring benchmark 10-year Treasury yields, which went up as high as above 1.8% on Jan 7 after standing at 1.51% on Dec 31. Growth sectors like the tech space have been feeling the pain of rising bond yields as the same decreases the relative value of future earnings, making the popular stocks seem overvalued. Tech companies also face hurdles in funding their growth and buying back stocks due to higher rates (per a CNBC article).
In this regard, Goldman Sachs’ Chris Hussey commented that “As we kick-started 2022 this week, trading attention fell on a definitive rotation into value and pro-cyclical stocks and out of growth as investors digested a sharply higher rate environment,” as stated in a CNBC article.
Thus, for investors looking to rotate out of the growth-focused investments, we have highlighted some interesting ETF areas:
It is worth noting here that value investing seems more lucrative, given the rebounding U.S. economy, the expectation of higher inflation and chances of Fed interest rate hikes. Moreover, value stocks seek to capitalize on market inefficiencies. They can deliver higher returns with lower volatility compared with their growth and blend counterparts. Additionally, value stocks are less exposed to trending markets and their dividend payouts offer a shield against market turbulence.
Against this backdrop, here are some value ETFs that investors can consider betting on. These are iShares S&P 500 Value ETF IVE, Vanguard Mega Cap Value ETF MGV, Schwab U.S. Large-Cap Value ETF (SCHV) and Invesco S&P 500 Enhanced Value ETF (SPVU) (read: 5 Top-Ranked ETFs to Buy At Bargain Prices).
Several factors are working in favor of the space. The Federal Reserve has already started tapering the bond purchases, which it expects to complete by March this year. The Fed is expected to begin raising its benchmark interest rate in March. There are possibilities of the Federal Reserve taking a more aggressive approach in raising interest rates. The shift toward a tighter monetary policy will push yields higher, thereby helping the financial sector. This is because rising rates will help in boosting profits for banks, insurance companies, discount brokerage firms and asset managers. The steepening of the yield curve (the difference between short and long-term interest rates) is likely to support banks’ net interest margins. As a result, net interest income, which constitutes a chunk of banks’ revenues, is likely to receive support from the steepening of the yield curve and a modest rise in loan demand.
Here we highlight some ETFs that can gain from the bright prospects of the banking sector, Invesco KBW Bank ETF KBWB, SPDR S&P Regional Banking ETF KRE, iShares U.S. Regional Banks ETF (IAT) and SPDR S&P Bank ETF (KBE) (read: Inflation to Stay Hot in Early 2022: ETF Strategies to Win).
Investors are closely tracking the energy sector, which is showing strength as global demand and economic growth levels are on the path of recovery from the pandemic lows. The coronavirus vaccine rollout is gradually controlling the outbreak's spread across the globe. The optimism surrounding the reopening of global economies and increasing demand are painting a rosy picture for the cyclical sectors.
According to a CNBC article, energy stocks are witnessing the best year in more than three decades. The sector gained more than 47% in 2021. Oil prices have been rising since the beginning of 2022. The upside in the crude oil prices is being triggered by a variety of factors like easing Omicron variant concerns, protests in Kazakhstan and outages in Libya causing supply shortages and less OPEC+ output.
Here are some options for investors to consider. These include Invesco Dynamic Energy Exploration & Production ETF PXE, Vanguard Energy ETF VDE, Fidelity MSCI Energy Index ETF (FENY), The Energy Select Sector SPDR Fund (XLE) and iShares U.S. Energy ETF (IYE) (read: Energy Emerges the Best Sector of 2021: 5 ETFs Up At Least 70%).
Consumers have shown unexpected resilience to the concerns regarding rising Omicron cases and high inflation levels in December. They seem to be optimistic about improving employment conditions and the recovering U.S. economy from the pandemic-led slowdown.
The Conference Board's measure of consumer confidence index stands at 115.8 in December, comparing favorably with an upwardly revised reading of 111.9 in November. December’s reading surpassed the consensus estimate of the metric, coming in at 111, per a Bloomberg poll.
The encouraging consumer confidence reading might support the consumer discretionary sector, which attracts a major portion of consumer spending amid rising inflation levels. Certain ETFs that might gain are The Consumer Discretionary Select Sector SPDR Fund XLY, Vanguard Consumer Discretionary ETF VCR, First Trust Consumer Discretionary AlphaDEX Fund (FXD) and Fidelity MSCI Consumer Discretionary Index ETF (FDIS) (read: ETFs to Drive Tesla's Near $1 Million Vehicle Deliveries).
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Consumer Discretionary Select Sector SPDR ETF (XLY): ETF Research Reports
SPDR S&P Regional Banking ETF (KRE): ETF Research Reports
Vanguard Consumer Discretionary ETF (VCR): ETF Research Reports
Vanguard Energy ETF (VDE): ETF Research Reports
Invesco KBW Bank ETF (KBWB): ETF Research Reports
iShares S&P 500 Value ETF (IVE): ETF Research Reports
Invesco Dynamic Energy Exploration & Production ETF (PXE): ETF Research Reports
Vanguard Mega Cap Value ETF (MGV): ETF Research Reports
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