According to data from Morningstar Inc., equity sector ETFs infused over $100 billion in 2021, up from $70 billion in 2020. There are now 494 such funds, with total assets of $806 billion, with combined assets from 370 equity sector ETFs. $346 billion in 2016.
“One of the big investment consequences of the pandemic is that people are looking for more targeted exposure, either within sectors or across sectors,” says Jay Jacobs, senior vice president and head of research and strategy at the Global X ETF.
When evaluating sector ETFs, “investors should look at a fund’s top 10 holdings to determine its accuracy within a sector or theme, and its expense ratio to determine its cost,” says BlackRock’s iShares MegaTrends, International and Jeff Spiegel, US Head of Sectors ETFs. ,
“Investors should look for funds that “focus on companies with high-quality, high-yield equities because a lot of risk moves around in the market,” says Sam Stovall, chief investment strategist at research firm CFRA. So which sectors are most likely to benefit from the confluence of factors that shake up the economy?
According to consensus estimates from S&P Global Market Intelligence, here are four areas that research analysts predict will be hot and have higher earnings-per-share growth forecasts for 2022.
1. Movies and Entertainment
The industry has one of the highest growth expectations for 2022, with analysts expecting earnings per share to grow 57.5% from last year, according to S&P Global data December 31. The industry hit a low point in 2020 with the US shutting down theaters amid the pandemic and the lockdown. But box-office revenue is poised to recover, according to PricewaterhouseCoopers, which is predicting a 37.3% compound annual growth rate for revenue through 2025.
“The combination of the reopening of movie theaters and demand for streaming entertainment is fueling a resurgence,” says Mr. Stovall.
Among funds in this sector is the Communication Services Select Sector SPDR (XLC), which has approximately $14 billion in assets and top holdings in companies such as Facebook parent Meta Platforms Inc., Google parent Alphabet Inc., AT&T Inc., Netflix Inc. and others. The Walt Disney Company, which delivered a 16% return in 2021, has an expense ratio of 0.12%.
Downside risk: If the Omicron version of COVID-19 continues in the US, earnings growth could stall, delaying consumers’ desire to go to theatres. Providers will also suffer due to slowdown in subscribers for streaming content. According to Deloitte, the churn rate for customers of video-on-demand services is projected to be 30% worldwide in 2022.
2. Aerospace and Defense
The sector’s earnings per share is expected to grow 25.2% in 2022, according to analysts’ consensus estimates. According to Deloitte’s “2022 Aerospace and Defense Industry Outlook,” all segments of this market are poised for growth. The emergence of the vertical lift plane [those that can depart, hover and land vertically], says John Koykendall, global aerospace and defense leader for Deloitte.
Last month, President Biden signed the National Defense Authorization Act into law, authorizing a 5% increase in military spending to $768 billion. And while the latest Omron version will challenge travel in the short term, Deloitte believes that both domestic and international travel will continue to recover through 2022.
This will increase the demand for commercial aircraft. Funds focused on this sector include iShares US Aerospace & Defense (ITA), which has about $2.5 billion in net assets and top holdings in Raytheon Technologies Corp., Boeing, Lockheed Martin Corp., Northrop Grumman Corp. and General Dynamics Corp. 9.4% in 2021 and the expense ratio at 0.42%.
Downside Risk: No. 1 concern is that Omicron’s growth could trigger lockdowns and slow recovery in air traffic. Continuous supply-chain bottlenecks and semiconductor and electronic shortages can also hurt manufacturers and the aftermarket. Lack of labor is another risk factor.
3. Online Retail
Analysts forecast earnings growth for Internet and direct-marketing retail by 25.9%. Research firm eMarketer sees US e-commerce sales to grow to about $1.2 trillion by 2023, accounting for 19% of all US retail sales in 2021, to $909 billion, or 15.5% of all sales. “We believe online shopping will continue. A driving force and extension,” says Todd Rosenbluth, head of ETF and mutual-fund research at CFRA.
Last year, the threat of higher interest rates locked investors into profits in sectors such as consumer discretionary and technology, says Mr. Stovall, CFRA. But EPS growth for 2022, with interest rates still relatively low, should revive interest in sectors with strong growth prospects, he says. ProShares Online Retail (ONLN) has a net worth of approximately $620 million. Its top holdings are Amazon.com, Alibaba Group Holding, eBay and DoorDash. The fund, which was down 25% in 2021, has an expense ratio of 0.58%.
Downside Risk: Amazon is an 800-pound gorilla at online retail. Antitrust bills have been introduced in Congress targeting Amazon and Big Tech for their market dominance. If this year passes, this industry titan could stumble, and it could hurt online retail stocks, say equity analysts.
4. Oil and Gas Exploration and Production
Oil and gas exploration is projected to increase this year, and the sector is expected to register 39% earnings growth. Analysts say the industry should benefit from rising domestic and global demand above pre-pandemic levels. Hurricane Ida damaged US offshore oil and gas production and companies are now rushing to get facilities back online as natural gas and oil prices soar. In November, President Biden tapped the country’s strategic oil reserves to ease supply concerns.
Dave Secera, chief US market strategist at Morningstar, says, “We believe the market is bucking the long-term decline in demand for oil and petroleum products and the sector is particularly looking to invest in oil sector services, exploration and production this year. offers opportunities.” CFRA energy equity analyst Stewart Glickman predicts that companies such as Exxon, Chevron and Pioneer Natural Resources will “spend 15% to 17% more on exploration and development in 2022.”
In the ETF, iShares US Oil and Gas Exploration and Production (IEO) has more than $320 million in net assets and tracks the Dow Jones US Select Oil Exploration and Production Index. Its top holdings include Conoco Philips, EOG Resources and Pioneer. The ETF had gained 76 per cent last year. Its expense ratio is 0.42%.
Downside Risk: Another COVID-related relief could slow the economy, reducing energy demand. OPEC could also lose its supply discipline and start producing much more barrels a day than its production target, weakening oil prices.
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