3 Top Ranked ETFs From The Hottest Sectors

Better-than-expected jobs report for February has raised hopes that the economy is beginning to thaw. Most analysts now believe that weak economic data for the past couple of months was mainly the result of unusually cold weather conditions. If they are correct, the economy might pick up momentum as the spring arrives.

Improving economy is one of the main reasons to believe that the five year old bull market still has legs. Further, even though the Fed may continue with gradual withdrawal of its QE program, the monetary policy is still very accommodative. With earnings near all-time high, US companies have been returning record amounts of cash to investors via dividends and buybacks.

Fourth quarter earnings have been a mixed bag, but at the same time, investors are clearly rewarding stocks and sectors that have been witnessing positive earnings momentum. One easy way to identify sectors with improving earnings prospects is to look at Zacks Industry ranks, which are based on earnings estimates revisions.

And a good way to invest in these sectors is to look at ETFs that have earned top Zacks ranks, based on their potential to outperform their peers.

Financial Select Sector SPDR Fund (XLF)
 
Financial sector’s performance has been in-line with the market this year. Mixed earnings and flattening yield curve weighed on the sector.

But long term rates may start creeping up with improving economy. Further housing market may pick up momentum after spring. Those developments will be positive for banks.

The Fed is set to release the “stress test” results for 30 large banks later this month. It is widely expected that many of these banks will get their capital plans approved and will be able to increase dividends and buybacks.

Looking at industries within the broader financial sector, insurance (ranked #3 out of 62 M industries), investment managers (#6) and banks & thrifts (#7) are witnessing strong positive estimates revisions in the past few weeks, resulting in their top industry ranks as of now.

XLF is the largest and most popular ETFs in the financials space. This product has $18.5 billion in assets under management and trades in heavy volume of more than 40 million shares a day.

The ETF charges 16 bps in fees per year from investors and is the second cheapest choice among financial ETFs. The product currently holds about 83 securities in its basket—with Wells Fargo, JP Morgan Chase and Berkshire Hathaway being the top holdings.
 
In terms of industry exposure, the product has highest exposure to banks at 38% while insurance, capital markets, REITs and diversified financial services also account for double-digit allocation.

The ETF has a Zacks ETF Rank of 1 or ‘Strong Buy’.

SPDR S&P Aerospace & Defense ETF (XAR)

Despite budget related worries, this small sector has been doing very well for the past many months, thanks mainly due to strong momentum in the commercial aviation market. "Aerospace & Defense" is currently #5 (out of 62) on the Zacks M industry list.

Fourth quarter earnings were excellent for the Aerospace sector with an 88.9% earnings beat ratio, 88.9% revenue beat ratio and 20.0% earnings growth.

Launched in September 2011, this product tracks S&P Aerospace and Defense Select Industry index, which is a modified equal weight index.

This product has attracted AUM of $52.6 million so far. It holds 36 securities with weighted average market cap of $21.7 billion. It charges 35 basis points in expenses and has a decent dividend yield of 1.2% currently.

Being modified equal weighted, the fund is pretty well diversified with the top holding accounting for just 4.6% of total assets. It has returned almost 60% in the past one year.

XAR is a Zacks Rank #1 (Strong Buy) ETF.

First Trust NASDAQ Clean Energy Green Energy Index (QCLN)

Alternative energy is one of the hottest industries in the energy sector, thanks mainly to concerns about carbon emission, climate change and other environmental issues.  QCLN is based on the NASDAQ Clean Edge Green Energy Index.  Launched in 2007, the fund now has $194.8 million.

The industry is currently ranked #4 (out of 62) on the Zacks M industry list.

QCLN holds 42 securities in its basket and is top heavy with top 10 holdings accounting for more than 60% of assets. Current investor darling Tesla Motors is the top holding with more than 12% of the asset base.

The fund has delivered scorching returns of almost 95% in the last one year.

QCLN is a Zacks Rank #1 (Strong Buy) ETF.

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