As the new year begins, analysts on Wall Street are debating which sectors might do well in 2022. Some highlight how the ongoing pandemic, supply chain issues, chip shortages and moves by the Federal Reserve could affect various sectors of the economy along with broader indices.
Forecasts by investment banks and asset managers suggest that the new year will likely be another volatile one. For instance, JPMorgan Chase sees the end of the pandemic and remains "positive on equities, commodities and emerging markets and negative on bonds."
Finally, UBS believes investors should focus on "the net-zero carbon transition and the "ABC" of disruptive technologies—artificial intelligence, big data, and cybersecurity." And they should:
"Buy the winners of global growth... Seek opportunities in healthcare... Position for a stronger US dollar ."
Therefore, today we'll introduce two exchange-traded funds (ETFs) that could see higher returns in the months ahead.
1. Invesco S&P 500 Equal Weight ETF
- Current Price: $162.75
- 52-Week Range: $124.62 - $163.86
- Dividend Yield: 1.28%
- Expense Ratio: 0.20% per year
Most of our readers know that the S&P 500 is a market-cap-weighted index. In other words, a firm's valuation affects how much influence it would have over the performance of this index.
Currently, around $13.5 trillion is indexed (or benchmarked) to this key gauge of the US stock market. Investors who want a piece of the growth of the leading 500 companies in the US typically buy an ETF like the SPDR® S&P 500 (NYSE: SPY ).
The top 10 businesses in SPY comprise about a third of its assets. Therefore large moves in these names impact the fund’s returns. Apple (NASDAQ: AAPL ), Microsoft (NASDAQ: MSFT ), Amazon (NASDAQ: AMZN ), Alphabet (NASDAQ: GOOGL ), and Tesla (NASDAQ: TSLA ) lead the fund.
Our first ETF for today, the Invesco S&P 500® Equal Weight ETF (NYSE: RSP ), is instead an equal-weighted version of the SPY fund. Since its launch in April 2003, net assets in RSP have gone over $32 billion.
RSP tracks the returns of the S&P 500 Equal Weighted Index . As a result, the leading 10 names comprise about 2.3% of the fund.
Among the top stocks are Cerner Corporation (NASDAQ: CERN ), which provides healthcare information technology (HCIT) solutions; ABIOMED (NASDAQ: ABMD ), which manufactures and distributes medical devices, enterprise software group Citrix Systems (NASDAQ: CTXS ), CF Industries Holdings (NYSE: CF ), which manufactures hydrogen and nitrogen products, and Activision Blizzard (NASDAQ: ATVI ), which publishes video games. Tech giants Apple, Microsoft and Amazon each have a weighting of less than 0.20%.
In the past 52 weeks, RSP returned almost 27.6%. By comparison, SPY was up 27.0% in the past year. Both ETFs hit all-time highs on Dec. 30, 2021.
We believe the fund could find a place in many retail portfolios. Its forward P/E and P/B ratios stand at 17.45x and 3.24x, respectively. A potential decline toward $157 or below would offer better value.
2. iShares PHLX Semiconductor ETF
- Current Price: $542.32
- 52-Week Range: $374.86 - $558.28
- Dividend Yield: 0.64%
- Expense Ratio: 043% per year
Headlines regarding the semiconductor shortage and its effects on various industries have dominated much of the financial news in recent months. The Biden administration is encouraging US chipmakers to boost manufacturing capacity domestically. For instance, in August, the US Department of Defense chose Intel (NASDAQ: INTC ) for a major chipmaking contract.
Meanwhile, Intel’s management says:
“The U.S. once led the world in semiconductor manufacturing, but we have fallen behind… Semiconductors have never been more essential to our economic and national security. Semiconductors represent the fifth-largest U.S. export sector, supporting a quarter million U.S. jobs directly and over a million indirectly.”
Therefore, Wall Street is likely to pay attention to chip names in 2022 as well. Our next fund is the iShares PHLX Semiconductor ETF (NASDAQ: SOXX ), one of the largest names focusing on the industry. It was listed in July 2001.
SOXX, which currently has 30 holdings, tracks the returns of the Philadelphia Semiconductor Index (SOX). The top 10 stocks comprise about 60% of net assets of $9.5 billion. Broadcom (NASDAQ: AVGO ), Qualcomm (NASDAQ: QCOM ), NVIDIA (NASDAQ: NVDA ), Intel, and Advanced Micro Devices (NASDAQ: AMD ) are the fund’s five largest holdings.
Over the past year, SOXX is up 43.0% and saw a record high in recent days. Trailing P/E and P/B ratios of 34.60x and 7.71x suggest that there could be some profit-taking ahead.
Many semiconductor names will report quarterly metrics in a few weeks. Therefore, we could see investors hit the ‘sell’ button if fundamental numbers or the annual outlook urge caution.
Yet such a potential decline would bring an opportunity for buy-and-hold investors. Despite any short-term volatility, we remain bullish on chip names.
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