Favoring Cyclical Sectors to Start 2022 | ETF Trends

Key Takeaways

Fundamental Context

CFRA thinks cyclical sectors will be boosted now that the Omicron-induced selloff has likely run its course. Sam Stovall, CFRA Chief Investment Strategist, upgraded his recommendations on the Information Technology sector (29% of the S&P 500) and the Energy sector (2.8%) to Overweight from Marketweight this week. While no sectors were downgraded, the pair joins Communication Services (10%) and Materials (2.5%) as favored sectors from a top-down perspective. CFRA maintains Underweight recommendations on the more defensive Real Estate (2.7%) and Utilities (2.4%) sectors heading into 2022. Stovall noted that the Information Technology and Energy sectors have also shown relative strength, positioning them for potential outperformance in 2022.

The recent pullback in high-growth, Technology-oriented names represents an enhanced buying opportunity heading into 2022 amid a rising interest rate environment where supply constraints and inflationary pressures are likely to ease. Angelo Zino, a senior technology equity analyst at CFRA thinks secular growth opportunities remain intact for Software-as-a-Service/cloud computing providers, such as salesforce.com (CRM) and Workday (WDAY), with the pandemic having had a permanent positive effect on the space, while the semiconductor industry appears in the midst of a supercycle, as content growth per device across a host of markets is accelerating, driven by the emergence of greater AI capabilities. CFRA also highlighted that the two biggest components of both the sector and the S&P 500, Apple, and Microsoft, are poised to benefit from attractive pipelines and secular growth tailwinds in 2022 and beyond. While CFRA acknowledges multiples have expanded for the sector in recent memory, Zino thinks it is warranted to account for the more recurring-revenue based, higher-margin business models, improving free cash flow metrics and growth prospects ahead.

There are 17 U.S.-focused information technology ETFs that earn CFRA four- or five-star ratings. CFRA star ratings combine holdings-level analysis from our fundamental and forensic research team as well as assessment of a fund’s costs, sentiment, and performance record. This forward-looking approach is conducted on technology funds in relation to offerings tied to other sectors. We separately rate U.S.-diversified and global-equity funds using a different methodology.

VGT and XLK are the two largest technology sector ETFs based on assets under management according to CFRA ETF data, and both earn a CFRA five-star ETF rating. They are diversified across various industries, including semiconductors, software, technology hardware, storage & peripherals, but AAPL and MSFT represent more than 40% of assets. Invesco S&P 500 Equal Weight Technology ETF (RYT) is a four-star rated fund. RYT owns the same S&P 500 constituents as XLK, but AAPL and MSFT are the same size as all other stocks within the sector.

Meanwhile, though it has some international equity exposure, CFRA also likes Global X Cloud Computing ETF (CLOU) as a way to invest in the cloud theme highlighted above.

Investors have fewer appealing choices in the energy sector. CFRA has four or five-star ratings on just two of 19 ETFs classified in the U.S. sector. While there are many industry-focused products available, CFRA recommends the more broadly diversified iShares U.S. Energy ETF (IYE) and Vanguard Energy ETF. The funds have hefty exposure to Buy recommended Chevron, ConocoPhillips (COP), and Exxon Mobil. Action Economics forecasts WTI oil prices to average $83.26 by Q4 2022, due in part to a 4.6% projected rise in global GDP. Meanwhile, OPEC’s continued strong supply discipline will likely maintain upward pressure on prices, according to Stovall, who noted that the sector is expected post well-above-market EPS growth in 2022.


CFRA thinks cyclical sectors will outperform more defensive ones to start 2022. To gain exposure, investors can choose among many favorably rated stocks and ETFs. Our research is forward-looking, based on the fundamentals of the investments and not reliant solely on past performance.

Todd Rosenbluth is Director of ETF & Mutual Fund Research at CFRA.