Cyclical stocks could outperform defensive assets for the second half of the year. Exchange traded fund investors can also target the more aggressive cyclical stocks through the growth style.
According to Goldman Sachs Group, cyclicals could outpace defensive, non-cyclicals for the rest of the year as the economy improves, reports Kristen Scholer for the Wall Street Journal.
“We expect Cyclicals, which trade at a 3 point P/E multiple discount versus Defensives (16x vs. 19x), will outperform as oil prices settle and rates rise in 2H 2015,” David Kostin, chief U.S. equity strategist at Goldman, said in a note.
Cyclical stocks, like materials, industrials, energy and technology companies, are more economically sensitive and do well when the economy is improving. With the Federal Reserve set to hike rates, the rising rate environment would signal a better economic outlook.
Additionally, after the steep sell-off in the energy sector, following the plunge in West Texas Intermediate Crude oil from June 2014, oil majors could be on a path to recovery.
Consequently, investors may target more cyclical U.S. stocks through growth-oriented ETFs. For instance, the PowerShares QQQ (NasdaqGM: QQQ) tracks the Nasdaq-100 and includes a heavy 53.1% tilt toward the tech sector, along with a 14.0% position in consumer cyclicals.
Investors can also target growth-specific index ETFs, like the iShares Russell 1000 Growth ETF (NYSEArca: IWF), iShares S&P 500 Growth ETF (NYSEArca: IVW) and Vanguard Growth ETF (NYSEArca: VUG). IWF takes growth picks from the large-cap universe of Russell 1000 stocks. IVW highlights growth names from the S&P 500. VUG selects picks from the largest 85th percentile of the U.S. stocks. All three ETFs overweight tech and discretionary names as well.
Investors can also capture mid cap growth stocks through the iShares Russell Mid-Cap Growth ETF (NYSEArca: IWP), Vanguard Mid-Cap Growth (NYSEArca: VOT), iShares S&P Mid-Cap 400 Growth ETF (NYSEArca: IJK) and Guggenheim S&P Midcap 400 Pure Growth ETF (NYSEArca: RFG). These funds also include heavy positions in consumer cyclical, industrials and technology sectors.
Lastly, for smaller company exposure with a growth style tilt, the iShares Russell 2000 Growth ETF (NYSEArca: IWO), Vanguard Small-Cap Growth ETF (NYSEArca: VBK) and iShares S&P Small-Cap 600 Growth ETF (NYSEArca: IJT) focus on the small-capitalization growth asset class category.
In contrast, defensive areas, such as healthcare consumer staples and utility stocks, are less risky and typically generate higher yields than economically sensitive growth stocks. However, these defensive sectors look less attractive in a rising rate environment as less-risky government bonds come with higher yields.
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Max Chen contributed to this article.