After a lackluster first quarter, the U.S. economy could pick up steam, and investors can capitalize on the faster growth through cyclical stocks and sector-related exchange traded funds.
“As earnings move slowly higher, the market should generally rise in that direction,” David Kostin, chief U.S. equity strategist for Goldman Sachs, said on CNBC. “So from a strategy perspective, we look more for cyclicals, and lower valuations would be a good strategy in this environment.”
Specifically, Kostin is bullish on automotive, airline and technology stocks, pointing to their relatively cheaper valuations. For instance, cyclicals are trading around a 16 times forward earnings and provide better exposure to a growing economy if gross domestic product picks up. In contrast, the recent slowdown has pushed more people into defensive stocks, which are now trading at around 19 times forward earnings.
While there are no listed U.S.-specific automobile ETFs available, investors can take a look at the First Trust NASDAQ Global Auto Index Fund (NasdaqGM: CARZ), which provides access to global automobile manufacturers, including a 23.4% tilt toward U.S. companies. CARZ is trading at a 10.2 P/E ratio, compared to the S&P 500 Index’s 18.4 P/E ratio and a 20.4 P/E ratio for the defensive Consumer Staples Select Sector SPDR (NYSEArca: XLP).
ETF investors can now track the airline industry through the U.S. Global Jets ETF (NYSEArca: JETS). The recently launched JETS ETF is comprised of U.S. and international passenger airline companies, aircraft manufacturers and airports and terminal services companies. [A Smart-Beta Airline ETF Takes Off]
For tech exposure, there are a number of broad ETFs to select from, including the Technology Select Sector SPDR (NYSEArca: XLK), iShares U.S. Technology ETF (NYSEArca: IYW) and Vanguard Information Technology ETF (NYSEArca: VGT). XLK tracks the tech sector from the S&P 500 index. IYW also tracks a similar group of tech companies taken from the Dow Jones U.S. Technology Index and does not include telecom stocks. VGT, on the other hand, includes a small position in information technology services companies. [Look to Tech ETFs for Growth Opportunities]
“From an economic perspective, the U.S. is showing signs of improvement, from the housing point of view, from consumer, the labor market,” Kostin said. “All of those would suggest the economy is getting better, which would suggest, again, strategically, you want to be in more cyclicals and lower valuation stocks.”
For more information on market sectors, visit our sector ETFs category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.