Time For These Top-Rated Cyclical ETFs?

The markets have been lukewarm lately as participants are holding their breath to study every bit of the Fed-related news. No doubt, signs of a snap-back are pretty much there in the U.S. economy, but the recoil is not flawless and the global market volatility ticked up to a delirious level thanks mainly to the China issues.

Also, previous remarks by the Fed have only added to the uncertainty as the central bank sought more improvement in the labor market and inflation backdrop. The U.S. economy underwent an upward GDP revision for the second quarter of 2015, from 2.3% reported earlier to 3.7% upgraded later on strong domestic demand. If this was not enough, the unemployment rate dropped to 5.1% in August, the lowest since April 2008 (read: ETFs to Move on Mixed U.S. Job Data).

While this more-than-seven-year low unemployment rate should bolster the case for an imminent policy tightening, a still-muted inflation backdrop backed by an oil price slump, lackluster wage gains, a missed job expectation in August and a feeble overseas market are blurring the optimism. All these have put this week’s Fed meeting in the high-alert zone.

Cyclicality of Sectors 

Whatever the case, no one can deny the growth in the American economy given the solid housing data, improved confidence among citizens and decent recovery (if not brisk) in several cyclical sectors like retail. Added to this, historically cyclical sectors outperform the defensive ones when the rates normalize.

These areas often slump when the economy is tumbling, but are among the biggest winners when the economic environment turns favorable. Among the cyclical ones, as per Fidelity, sectors like consumer discretionary and financials and economically sensitive sectors like industrials and information technology tend to do better in the early cycle of the an economic recovery.

Fidelity defines an early cycle phase when economic activity revives, credit starts to grow, policy is still accommodative and sales and profits improve. With many of these conditions present in the U.S. economy, we can conclusively say that the coming months will be fairly dominated by the cyclical sectors.

If the Fed at all hikes rates this month, it should not be more than just 25 bps; otherwise, investors might see the timeline shifting to the end of the year. In either of the case, a few cyclical sectors and the related ETFs are expected to perform impressively especially given the expected earnings growth trend. For these investors, we highlight three ETF picks below that have heavy exposure to the cyclical industries:

Market Vectors Retail ETF (RTH)
 
The retail sector can best reflect the lift in an economy as it revolves around discretionary purchases. Though the August Retail Sales report was mixed, with the ‘headline’ growth rate falling short of estimates, its internals exhibited improved momentum and the prior-month’s numbers were revised higher.