Cyclical sectors historically perform well in the fourth quarter and that could be especially true this year as the Federal Reserve could possibly raise interest rates, a move that could benefit cyclical groups such as industrials and technology.
Data suggest investors have recently been allocating to cyclical ETFs, including the Industrial Select Sector SPDR (NYSEArca: XLI) and the Technology Select Sector SPDR (NYSEArca: XLK).
Although the aerospace and defense industry is perceived as being beholden to Uncle Sam’s whims, the allure of late-cycle sectors, including industrials, in a rising rate environment remains in place. Industrials perform well when interest rates rise because rising rates can go hand-in-hand with economic growth.
Related: Government Programs Send Aerospace ETFs Flying
In addition to political rhetoric, potential catalysts for aerospace ETFs include include, renewed airline pricing power evidenced by higher ticket prices, and more fees paid per traveler, increased airline profitability, new aircraft program launches and continued demand for aircraft models and technology.
Rivals to XLI include the Fidelity MSCI Industrials Index ETF (NYSEArca: FIDU), iShares U.S. Industrials ETF (NYSEArca: IYJ) and the Vanguard Industrials ETF (NYSEArca: VIS).
“Rate speculation seemed to be reflected in sector flows for the month of October. The strongest ETP inflows relative to current AUM were in Financials, Industrials, and Technology. These sectors tend to perform well during rate increases based on historical returns. In contrast, there were outflows in REITs, Consumer Staples, and Utilities, which are traditionally more adversely affected by rising rates,” according to a Credit Suisse note posted by Johanna Bennett of Barron’s.
[related_stories]Impressive earnings reports have recently helped lift the technology sector and ETFs such as XLK. . Historically, after a profit falloff, the technology sector has been among the best areas in a rebound.
“The only sector that has record an increase in expected earnings growth since the start of the quarter (due to upward revisions to earnings estimates) is the information technology sector,” according to FactSet.
SEE MORE: 46 Tech ETFs to Tap Into Big Growth Names
“The rotation out of defensive plays and into riskier bets has been ongoing since September. Earlier this week, Savita Subramanian, an equity and quantative strategist at Bank of America Merrill Lynch Global Research, cited the shift when noting that a respectable 58% of active funds tracked by the firm outperformed their benchmarks both in October and the broader third quarter. Among those funds, overweight positioning technology were at a six -year high and funds were boosting their exposure to energy,” according to Barron’s.
For more news and strategy on the Technology market, visit our Technology category.
Technology Select Sector SPDR
