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4 ETFs to Play the Key Events in Q4

Wall Street may currently have a volatile run but the fourth quarter has mostly been favorable for investors. The S&P 500 rises about 4.3% in the fourth quarter, per Barron’s, making it the best quarter of the year. Over the past decade, the S&P 500 Index has averaged a 4% gain, according to a CNBC analysis of Kensho released in 2019.

The S&P 500 had traded positively 80% of the time. The Dow Jones Industrial Average had gained 5% in fourth quarters over the past 10 years, trading in the positive zone for 80% of the time.

Key Events Scheduled for Q4

Holiday Season: The late October-December period embraces the key holiday season, which puts the spotlight on the performance of retailers. As loads of sales-boosting events — Halloween, Thanksgiving, Cyber Monday, Black Friday and Christmas — fall in this quartile, the sector generally sees a sales boost.

Mastercard SpendingPulse released its holiday forecast in September, which says U.S. retail sales are expected to rise non-inflation adjusted 7.1% year over year (up 8.5% versus 2021) for the holiday season, excluding autos and gas.

And e-commerce is expected to increase 4.2%. In-store retail sales are expected to be up 7.9%. While e-commerce has seen substantial growth in recent years, in-store spending accounted for more than 4/5th of retail sales from January through August 2022.

Low levels of unemployment coupled with sustained monthly job creation and rising wages might encourage consumers to spend more during the holiday season. However, inflationary pressure is a concern. Consumers will look for deals. Holiday shopping will likely get started earlier this year, i.e, around October.

Chances of a Fed Rate Hike: The Federal Reserve has been on an aggressive tightening policy to fight skyrocketing inflation, which is running near its highest levels since the early 1980s. Fed Chair Jerome Powell raised interest rates by another three-quarters of a percentage point in late September. This marked the third consecutive interest-rate hike of 0.75% (read: Guide to Interest Rates Hike and ETFs).

Federal Reserve Chair Jerome Powell said in September the central bank would continue to raise rates to fight inflation 'until the job is done'. Fed officials now expect the federal funds rate at a range of 4.25% to 4.5%, a full percentage point above 3.25% to 3.5% to end 2022, projected in June. This suggests the central bank could approve another three-quarter point hike at its November meeting and then a half-point rate rise in December.

4 ETFs to Buy

In this light, we highlight a few ETFs that could be great picks for the fourth quarter.

SPDR S&P Retail ETF XRT – Zacks Rank #2 (Buy)

The cyclicality of the sector and an expected surge in sales amid holiday season make XRT our choice. The fund invests about 19.6% in apparel retail, which would be a key selling area in the holiday season. Apparel sales are likely to be up 4.6% year over year in Q4 of 2022, per Marstercard Spending Pulse (read: Best Industry ETFs to Play).

iShares PHLX Semiconductor ETF SOXX – Zacks Rank #1 (Strong Buy)

The technology sector could be a great long-term bet. Within the broader tech space, semiconductor, the value-centric traditional tech area gains an edge in a still-edgy investing backdrop. Demand for gadgets will remain high in the quarter. Electronics normally remain at the top of Black Friday bargains. Electronics sales are expected to grow 3.5% in Q4, per Marstercard Spending Pulse.

Amplify Online Retail ETF IBUY

The current wave of digitization is favoring both ecommerce pure-plays and traditional retailers, which are stepping into ecommerce to tap the surge in online shopping. So, no wonder, IBUY would be a hot investing area in Q4.

Industrial Select Sector SPDR Fund XLI – Zacks Rank #2

Industrial sector has been one of the top performers of the fourth quarter over the last 10 years with an average return of around 6%, per CNBC. Industrial Products sector logged 12.3% earnings growth (on 12.1% revenue growth) in Q3 and is expected to register 16.1% expansion in earnings in Q4 (on 10.2% revenue upside).

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Industrial Select Sector SPDR ETF (XLI): ETF Research Reports
SPDR S&P Retail ETF (XRT): ETF Research Reports
iShares Semiconductor ETF (SOXX): ETF Research Reports
Amplify Online Retail ETF (IBUY): ETF Research Reports
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