3 Sector ETFs to Buy for Q3

Wall Street is in great shape this year. The S&P 500 has surged 14.5%, the Nasdaq Composite has jumped 18.1% and the Dow Jones has nudged up 3.8%, while the Rusell 2000 is up only 1%. In the ongoing bull market, technology stocks have been at the forefront, driven by an unexpected surge in artificial intelligence interest among investors.

However, with the rally expanding over the last few months, sectors beyond technology have started to reclaim prominence, indicating a widening of the market breadth. Analysts see more gains in the cards for Wall Street. However, many investors have overvaluation concerns after such a stupendous rally.

Against this backdrop, some investors may be a bit clueless about finding sectors that are currently hot. For them, we have presented four sectors that boast an upbeat Zacks Rank. These sectors and their ETFs could be great picks now.

Sectors & ETFs in Focus

Against this backdrop, below we highlight a few sectors and their ETFs that could be up for gains in the third quarter. To do so, we depend on the Zacks Sector Rank. The Zacks Sector Rank is determined by calculating the average Zacks Rank for all the stocks in the 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, the sector with the better average Zacks Rank would get 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 the top sector (1 out of 16), which would place it in the top 1% of Zacks Rank Sectors. The top 8 Zacks Ranked Sectors would be in the top 50% of sectors, whereas the bottom 8 Zacks Ranked Sectors would be in the bottom 50% of sectors. The sectors mentioned below have upbeat Zacks ranks.

Let's find out!

Industrials – Zacks Sector Rank #2

The industrials sector is set to benefit as business conditions have improved and demand seems to be solid. About 70% of the industries fall under the top-ranked category. Electronics, procurement and fabrication, steel-pipe and tube, and engineering-R&D services are some of the industries under this category.

The sector's forward P/E is currently 17.25X, lower than the S&P 500's 18.51X. The sector's projected EPS growth is 8.27% versus 6.12% growth likely to be seen for the S&P 500. Industrial Select Sector SPDR 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. housing sector is in the doldrums currently. But the overall construction sectorlooks attractive given that many of the underlying industries' earnings estimates have seen more positive revisions than negative. Homebuilders, air conditioners and heating, wood, mobile homes and RV builders deserve special mention in this regard.

The construction sector is currently undervalued than the S&P 500 and its projected EPS growth is higher than the S&P 500. Investors can target Invesco Building & Construction ETF PKB to bet on the sector.

Image Source: Zacks Investment Research

Aerospace – Zacks Sector Rank #5

The sector's performance has been lackluster in 1H 2024, as it lost by 4.8%. The sector has been disliked by investors probably because it is slightly overvalued than the S&P 500 and its historical EPS growth fell short of the S&P 500.

However, the scenario may change in the coming days as the projected EPS growth rate of the aerospace industry is 18.19% (versus the S&P 500). Currently, the fundamentals behind the sector are positive as the sector tends to benefit from rising geopolitical tensions, which result in increased defense spending worldwide.

The demand profile in the sector is on an upward trajectory. iShares U.S. Aerospace & Defense ETF ITA has a Zacks Rank #2.

Image Source: Zacks Investment Research

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