The final month of the year brought joy for Wall Street with the S&P 500 gaining about 4.3% in the past one month on easing Omicron fears and more upbeat news about therapies and boosters (read: Pfizer (NYSE:PFE) ETFs to Rise on FDA's EUA for COVID-19 Oral Antiviral Pill).
The year has been super upbeat for the S&P 500 with about 27.6% gains. With the Fed tightening policies now, the index looks a bit overvalued. The S&P 500’s forward price-earnings ratio (for Q1 of 2022) came out to 22.88 times.
Against this backdrop, it would be intriguing to highlight a few sector ETFs that have below-average P/E ratios in the space.The below-mentioned sector ETFs have a P/E (36 months) less than that of the largest ETF SPDR S&P 500 ETF SPY (21.70x) and a Zacks Rank #2 (Buy).
These sector ETFs are iShares U.S. Home Construction ETF ITB, Materials Select Sector SPDR ETF XLB, Health Care Select Sector SPDR ETF (NYSE:XLV) XLV and Invesco Dynamic Food & Beverage ETF PBJ.
What Are the Bright Points in 2022?
Along with various research houses, we too believe that earnings growth should be strong, thanks to consumer spending and capital expenditures. Per the Zacks Earnings Trends issued on Dec 15, 2021, the S&P 500 earnings are expected to be up 8.7% in 2022 over and above the 45.4% expected earnings growth in 2021. Revenues are likely to expand 7.4% in 2022 on top of 11.7% likely gains in 2021. Margins are likely to be 0.15% and 3.15% in 2022 and 2021, respectively.
The White House passed the $1.2 trillion bipartisan infrastructure bill in November. This is likely to boost Wall Street in 2022. The infrastructure bill of $550 billion in addition to the previously approved funds of $450 billion for five years is a tailwind for U.S. economic growth. The 2,702-page legislation is aimed at establishing the United States with the world's best economic infrastructure (read: 4 Sector ETFs to Make the Most of Infrastructure Bill).
Household and corporate cashpile will pull off the economy. In September, the Federal Reserve reported that the net worth of U.S. households was $134 trillion in the second quarter — up from $128.4 trillion in the first quarter. That figure stood at $110 trillion in the fourth quarter of 2019, before the pandemic hit. Including nonprofits, accumulated household net worth in the second quarter hit a record $141.7 trillion, as reported on Wall Street Journal. Total cash on hand and in U.S. banks held by U.S. corporations was $268 trillion in Q2 of 2021, up from $262.9 trillion in Q1 and $155.7 trillion in Q4 of 2019.
Overall, the investment backdrop is pretty mixed with perils and possibilities on either side. While corporate earnings and their cash balances are in fine fettle, inflationary pressure is a drag. Pandemic-led supply chain disruptions and rising rate worries amid Fed tightening can’t be overruled. Let’s discuss the ETFs in detail.
Homebuilding – iShares U.S. Home Construction ETF (ITB)
The thirst for home buying has risen even in the face of increasing housing prices and supply-chain disturbances, thus benefiting homebuilders. No wonder, existing home sales data have come in strong.
Rank #2
P/E: 16.59x
Materials – Materials Select Sector SPDR ETF (XLB)
Rising inflation is a plus for materials prices. Earnings from the sector in Q4 are expected to be 77.1% versus 136.1% in Q3. Revenues from the sector are expected to be 27.8% in Q4 versus 38.7% in Q3. Earnings growth projection is the highest among the 16 S&P 500 sectors covered by Zacks, while the revenue growth projection is the third highest (read: Estimates for Q4 Dropping: 4 Sector ETFs See Positive Revisions).
Rank #1
P/E: 16.88x
Healthcare – Health Care Select Sector SPDR ETF (XLV)
As long as the COVID-19 fear is around, demand for therapies and vaccines will remain strong. Hence, one should keep a close watch on XLV.
Rank #2
P/E: 17.38x
Consumer Staples – Invesco Dynamic Food & Beverage ETF (PBJ)
Demand for food and beverage should remain in the sweet spot in the coming days as these are necessary items and less ruffled by economic weakness, if there is any (read: 4 ETF Areas to Play Upbeat Manufacturing Data).
Rank #2
P/E: 17.84x
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SPDR S&P 500 ETF (SPY): ETF Research Reports
Materials Select Sector SPDR ETF (XLB): ETF Research Reports
Health Care Select Sector SPDR ETF (XLV): ETF Research Reports
iShares U.S. Home Construction ETF (ITB): ETF Research Reports
Invesco Dynamic Food & Beverage ETF (PBJ): ETF Research Reports
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Zacks Investment Research