It wasn’t too long ago when the capital markets were awash with strategic countermoves to a recession, such as piling into bonds and selecting equities that were deemed as value-oriented plays. Now, it might be that investors are once again mashing the risk-on accelerator pedal and opting for cyclical equities over defensive equities.
As the S&P 500 and Dow Jones Industrial Average are roaring to new highs, it might seem that investors are keen to get back into cyclical equities given the latest optimism in the markets. Per a LA Times report, the move to cyclicals is driven primarily by U.S.-China trade deal negotiations—“Behind their resurgence are rising hopes that the United States and China are making progress in negotiations on their trade dispute, or at least that they’re no longer making it worse. Reports last week also showed that the job market is continuing to grow, corporate profits aren’t doing as badly as Wall Street expected and interest rates will probably remain low for a while.”
Of course, what it means is that cyclical strength could be solely dependent on a trade deal, meaning it could all go awry and defensive equities could come back to the forefront if a deal falls through. For ETF investors, however, this presents an opportunity for relative value ETF plays in cyclical and defensive equities.
For investors looking for continued upside in U.S. cyclical sectors over defensive sectors, the Direxion MSCI Cyclicals Over Defensives ETF (NYSEArca: RWCD) offers them the ability to benefit not only from cyclical sectors potentially performing well, but from their outperformance compared to defensive sectors.
RWCD seeks investment results that track the MSCI USA Cyclical Sectors – USA Defensive Sectors 150/50 Return Spread Index (the “index”). The fund, under normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in securities that comprise the Long Component of the index or shares of exchange-traded funds (“ETFs”) on the Long Component of the index. The index measures the performance of a portfolio that has 150% long exposure to the MSCI USA Cyclical Sectors Index and 50% short exposure to the MSCI USA Defensive Sectors Index.
Conversely, if investors believe that U.S. defensive sectors will outperform cyclical sectors, the Direxion MSCI Defensives Over Cyclicals ETF (NYSEArca: RWDC) provides a means to not only see defensive sectors perform well, but a way to capitalize on their outperformance compared to cyclical sectors.
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