Equities have had a rough start to the year overall. Much of the price weakness stemmed from investor concerns that rising interest rates would finally put the kibosh on the long-running rally – a rally that even managed to shrug off the powerful initial impact of the COVID-19 pandemic. 19. And these concerns are not entirely unreasonable.
This dynamic, however, does not mean that you should completely withdraw your money from the stock market. It just means you might want to think about how you stay there. Some environments favor certain types of stocks, while other market environments are better for other types of stocks.
With that in mind, here are four index exchange-traded funds that I think will fare better than the broader market in 2022.
iShares S&P 500 Value Fund
Here’s a premise that’s been suggested many times over the past few years, and wrong all the time: “It’s time for value stocks to shine.”
This is the year, however, where value stocks are likely to outperform a market that has been led primarily by growth names. The easiest and most accessible way to connect with this change is the iShares S&P 500 Value Fund (NYSEMKT:IVE), which is designed to mirror the performance of the S&P 500 Value Index.
Simply put, most value companies are better equipped to handle inflation than growth companies. Not only the constituents of the value index – names like Johnson & Johnson, Procter & Gamble (NYSE:PG), and Chevron – able to pass on their increased spending to customers, when interest rates rise, the higher cost of borrowing money for debt-financed expansion disproportionately affects growing businesses.
P&G’s results for the second quarter of 2022 – which it released on Wednesday – underscore this idea. Despite instituting several price increases over the past year, P&G’s sales for the period, which ended Dec. 31, rose 6%, beating estimates and prompting the goods company consumer staples to raise its sales forecast for the year. Half of last quarter’s sales growth was the result of higher prices its customers were clearly willing to pay.
Consumer Staples Select Sector SPDR ETF
While value indices will include many consumer staples players like Procter & Gamble that are able to adapt to an inflationary environment, a little extra exposure to the consumer goods arena might not be a bad idea. not this year either. Take into account Consumer Staples Select Sector SPDR ETF (NYSEMKT:XLP). It tracks the Standard & Poor’s Consumer Staples Select Sector Index, made up of companies such as the aforementioned P&G, Coke, tobacco giant Altria, walmart, and Colgate-Palmolive, just to name a few. These companies make and sell the products that people continue to buy fairly regularly in almost every economic environment.
Of course, the consumer staples space has underperformed other sectors since 2017, and the companies within it have collectively performed particularly poorly since the market emerged from its early 2020 slump. is the point, however. These stocks have relatively less to offer investors in an environment of recovery, strong growth and low inflation. That setting is changing, though – almost reversing in many ways.
Invesco Dynamic Leisure and Entertainment ETF
Admittedly, it’s a bit counterintuitive to suggest that consumer staple stocks are primed for leadership due to the developing adverse environment, and then to turn around and suggest that consumers are ready, willing and able to spend for fun. But that’s the current situation.
Think critically about economic recovery. The world is better and wages are rising, but incomes barely keep up with inflation. Household debt, especially credit card debt, is on the rise. Yet after nearly two years of a pandemic that has made it difficult to enjoy life to its fullest, people are beginning to wave caution. For example, the American Gaming Association reports that US gaming industry revenue reached record full-year levels at the end of November. And despite a slowdown in December compared to November numbers, spending on shopping and dining in the United States last year hit a record $5.3 trillion. Consumers are loosening their purse strings and opening their wallets, even if they can’t quite afford it.
This trend bodes well for Invesco Dynamic Leisure and Entertainment ETF (NYSEMKT: PEJ), meant to reflect the performance of the Dynamic Leisure & Entertainment Intellidex index. Some of its major holdings include an online travel agent Reserve credits, waltz disney, and National Live Entertainment.
SPDR S&P Transportation ETF
Finally, add the SPDR S&P Transportation ETF (NYSEMKT: XTN) to your list of funds positioned to beat the market this year.
The rebound from the COVID-19 contraction has been complicated, and it has been made even trickier by the resulting supply chain crisis. It turns out, however, that the bottlenecks are at least as much due to a lack of sufficient transport capacity as to the inability of companies to manufacture products. This capacity shortage proved a boon for air cargo carriers, shipping services and ground delivery teams, even though most of these industries were anything but ready to handle the impact of COVID-19. Now they are struggling to cope with the subsequent surge in demand created by the recovery from the previous lull. This demand – and the resulting pricing power – is not expected to diminish in 2022.
At the same time (and given all the recent disruptions), the logistics business is changing. Businesses are moving away from a just-in-time approach to sourcing supplies and adopting more of a just-in-case mindset. Meanwhile, consumers – who were once happy to shop regularly at the centralized distribution points that are physical retailers – now increasingly expect their purchases to be delivered directly to their doorsteps. This is the year when all the investments in so-called “last mile” delivery capabilities will really start to bear fruit. This is also the first year that most logistics service providers are willing to help retailers achieve this in a meaningful way.
The SPDR S&P Transportation ETF has balanced exposure to all aspects of this paradigm shift. With a portfolio modeled on the S&P Transportation Select Industry Index, the fund’s top holdings range from shipping equipment Kirby to the airline South West to the trucking company Schneider National on behalf of carpooling UberTechnologies. As such, it offers investors a balanced mix of all the slivers of an old-school industry that has become surprisingly modern and relevant.
This article represents the opinion of the author, who may disagree with the official recommendation position of a high-end advice service Motley Fool. Were motley! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.
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