5 ETFs Making the Most of the Great Market Rotation

Wall Street is currently witnessing the "Great Rotation" with investors shunning hot technology stocks in favor of smaller companies and other sectors. The combination of the Trump trade resurgence and the growing expectations of the Fed cutting rates in September has led to the rotation in the market.

The Dow Jones Industrial Average, which was underperforming, has gained 2.3% over the past week, outperforming the S&P 500 and the Nasdaq Composite Index, which shed nearly 0.7% and 2.2%, respectively. The Russell 2000 small-cap index has risen 3.4% in a week. Value investing is also being favored by investors as it involves buying stocks or other financial assets that are believed to be undervalued or trading below their intrinsic worth.

Chances of Donald Trump winning in November have risen steadily in recent weeks. Trump favors higher tariffs, particularly on imports from China, that could potentially hurt semiconductor stocks. Technology names, which powered the bull market this year, have lost their sheen lately.

Trump prefers more deregulation, which will benefit the health insurance, energy and financial industries as well as small-cap companies. Proposed extensions of corporate and personal tax cuts could increase budget deficits and result in higher government borrowing. Consequently, longer-dated bond yields have surged lately, steepening the yield curve.

Inflation in the United States cooled in June to the slowest pace since 2021, spiking the bets for rate cuts as soon as possible. Fed Chairman Jerome Powell's latest comment that the Fed wouldn't wait for inflation to get to its 2% target before it began cutting rates also lent support to the rate cut bets. According to the CME FedWatch tool, traders now see a 100% chance of the Fed lowering rates in September.

Pint-sized companies have a higher level of debt, and lower rates generally lead to reduced borrowing costs. This helps small businesses to expand their operations more easily and results in increased profitability. A rate cut after two years of tightening would be a big relief for banks, which have been struggling with the impact of high rates on their profits and their borrowers. While lower rates can compress net interest margins for banks, it will encourage lending and potentially lead to increased consumer and business loan activity.

High-dividend-yield sectors such as utilities and real estate will be the biggest beneficiaries of rate cuts, given their sensitivity to interest rates. This is especially true as these offer higher returns due to their outsized yields. In real estate, lower rates can boost housing market activity by making mortgages more affordable.

Given the great rotation, some ETFs, which were depressed this year, have started to gain momentum and hit new 52-week highs in the latest trading session. We have highlighted them in detail below:

Invesco S&P SmallCap 600 Pure Value ETF RZV – 52-Week High: $110.00

Invesco S&P SmallCap 600 Pure Value ETF offers exposure to the stocks of companies that exhibit strong value characteristics by tracking the S&P SmallCap 600 Pure Value Index. It holds 143 stocks in its basket, with key holdings in financials, consumer discretionary and industrials sectors.

Invesco S&P SmallCap 600 Pure Value ETF has AUM of $254.6 million and trades in an average daily volume of 12,000 shares. It charges 35 bps in annual fees and has a Zacks ETF Rank #3 (Hold).

Financial Select Sector SPDR Fund XLF – 52-Week High: $44.11

Financial Select Sector SPDR Fund ETF seeks to provide exposure to 71 companies in diversified financial services, insurance, banks, capital markets, mortgage real estate investment trusts, consumer finance, and thrifts and mortgage finance industries. It follows the Financial Select Sector Index, charging investors 9 bps in fees per year.

Financial Select Sector SPDR Fund is an ultra-popular ETF with AUM of $43 billion and trades in an average daily volume of 34 million shares. It carries a Zacks ETF Rank #1 (Strong Buy).

iShares U.S. Home Construction ETF ITB – 52-Week High: $118.66

iShares U.S. Home Construction ETF provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index.

With an AUM of $2.8 billion, iShares U.S. Home Construction ETF holds a basket of 44 stocks, with a heavy concentration on the top two firms. The product charges 40 bps in annual fees and trades in a heavy volume of around 2 million shares a day, on average. iShares U.S. Home Construction ETF has a Zacks ETF Rank #3.

iShares U.S. Real Estate ETF IYR – 52-Week High: $94.88

iShares U.S. Real Estate ETF offers exposure to the country's real estate companies and REITs, which invest in real estate directly and trade like stocks. It follows the Dow Jones U.S. Real Estate Capped Index. iShares U.S. Real Estate ETF holds a basket of 71 securities with key holdings in telecom tower REITs, industrial REITs and retail REITs. It has amassed $3.4 billion in its asset base while trading in a heavy volume of 4.2 million shares a day on average.

iShares U.S. Real Estate ETF charges 40 bps in annual fees and has a Zacks ETF Rank #3.

Vanguard Mega Cap Value ETF MGV – 52-Week High: $124.31

Vanguard Mega Cap Value ETF follows the CRSP US Mega Cap Value Index, which measures the performance of the largest value stocks in the U.S. market. It holds 134 stocks in its basket, with key holdings in financials, healthcare, industrials and technology sectors.

Vanguard Mid-Cap Value ETF has amassed $8 billion and trades in an average daily volume of 170,000 shares. It charges 7 bps in fees per year and has a Zacks ETF Rank #1 with a Medium risk outlook.

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