3 Sector ETFs to Buy for Q3

Wall Street has been in great shape this year. The S&P 500 is up 14.5%, the Nasdaq Composite is up 18.1% and the Dow Jones is up 3.8%, while the Russell 2000 is up just 1%. In the ongoing bull market, technology stocks are leading the way, fueled by an unexpected surge in investor interest in artificial intelligence.

However, as the rally has unfolded over the past few months, sectors beyond technology have begun to regain importance, indicating a broadening of market breadth. Analysts see more upside in the cards for Wall Street. However, many investors are wary of a revaluation after such an astonishing rally.

Against this backdrop, some investors may be a bit clueless when it comes to finding sectors that are currently hot. For them, we have outlined four sectors that boast bullish Zacks Ranks. These sectors and their ETFs could be great picks right now.

Sectors and ETFs in Focus

Against this backdrop, we highlight several sectors and their ETFs that could gain in the third quarter. For this purpose, we rely on the Zacks Sector Rank. The Zacks Sector Rank is determined by calculating the average Zacks Rank of all stocks in a sector and then assigning an ordinal rank to it.

For example, a sector with an average Zacks Rank of 1.6 is better than a sector with an average Zacks Rank of 2.3. So, a sector with a better average Zacks Rank will receive a better Zacks Sector Rank. Zacks classifies all stocks into one of 16 sectors.

If a sector has the best average Zacks Rank, it would be considered a Top Sector (1 of 16), which would put it in the top 1% of Zacks-ranked sectors. The top 8 Zacks-ranked sectors would be in the top 50% of sectors, while the bottom 8 Zacks-ranked sectors would be in the bottom 50% of sectors. The sectors listed below have Zacks Bullish Ranks.

Let’s find out!

Industry – Zacks Sector Rank #2

The industrial sector is expected to benefit as business conditions have improved and demand appears to be solid. Around 70% of industries fall into the top-rated category. Electronics, supply and manufacturing, steel pipes and tubes, and engineering, research and development services are some of the industries in this category.

The sector’s forward P/E ratio is currently 17.25X, lower than the S&P 500’s 18.51X. The sector’s projected EPS growth is 8.27% compared to the 6.12% growth that the S&P 500 is likely to achieve. Select Industry Sector SPDR (NYSE:XLI) has a Zacks Rank #2 (Buy).

Image Source: Zacks Investment Research

Construction – Zacks Sector Rank #3

Thanks to the double whammy of high prices and still-high mortgage rates, the U.S. real estate sector is currently stagnating. However, the overall construction sector looks attractive, given that many industry core earnings estimates have seen more positive than negative revisions. Homebuilders, air conditioners and heaters, lumber, mobile homes, and RV builders are particularly noteworthy.

The construction sector is currently undervalued relative to the S&P 500, and its projected earnings per share growth is higher than the S&P 500. Investors can target Invesco Construction & Building ETF (NYSE:PKB) to bet on this sector.

Image Source: Zacks Investment Research

Aviation & Aerospace – Zacks Sector Rank #5

The sector’s performance in H1 2024 was poor at 4.8%. This sector is not popular with investors, probably because it is slightly overvalued relative to the S&P 500 index, and its historical growth in earnings per share has been lower than the growth of the S&P 500 index.

However, this scenario could change in the coming days as the Aerospace industry is forecasted to grow its EPS by 18.19% (vs. S&P 500). Currently, the fundamentals of the sector are positive as the sector tends to benefit from the rising geopolitical tensions that are resulting in increased defense spending across the globe.

The demand profile in this sector is trending upwards. iShares US Aerospace & Defense ETF (BATS:ITA) has a Zacks Rank #2.

Image Source: Zacks Investment Research

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