As a closely segment of the yield curve inverts, signaling a potential recession ahead, investors may want to look to energy and technology sector ETFs in the mean time.
Bank of America Strategist Mary Ann Bartels argued that ETFs focused on technology and energy stocks could outperform as these industries have beaten the broader equity market following past bond inversions, Bloomberg reports.
Energy stocks have exhibited an especially strong track record of outperformance when the yield curve flips. Bartels added that the fact the sector has been “beaten down” should provide some cushion to any further potential weakness.
Looking ahead, Bartels recommended the Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy exchange traded fund, as the best way to access the energy industry. Since 1965, the energy sector outperformed the broader equity market 80% of the time over the following 12 months after a yield curve inversions, with an average gain of 7.3%, according to Bank of America. For example, after the 2005 yield inversion, the energy ETF gained 14% over the following 12 months, beating the S&P 500.
Tech Sector Pacing Ahead
While not as successful in its outperformance as the energy companies, the technology sector has still outpaced the broader equities space in the event of a yield inversion. Bartels also added that the tech segment’s exposure to growth and momentum factors could also help the sector maintain its lead.
For tech exposure, Bartels highlighted the Vanguard Information Technology ETF (NYSEArca: VGT).
On the other hand, Bartels warned that consumer discretionary stocks typically underperform the broader equity market following yield curve inversions.
Nevertheless, the strategist warned that the ongoing trade conflict between the U.S. and China could cause these sectors to break their historical trend since concerns over the global outlook due to the trade conflict could weigh on the markets regardless of trends.
For more information on the market sectors, visit our sector ETFs category.