5 Must-Have ETFs for the Second Half

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After a blockbuster first half, Wall Street extended its rally to start the second half with the S&P 500 and Nasdaq making their 34th and 24th record close in 2024, respectively. The S&P 500 climbed 2% last week and the Dow Jones Industrial Average rose 0.7%. According to Dow Jones Market Data, the Nasdaq Composite Index rallied 3.5%, marking the biggest weekly percentage rise since the stretch ending Apr 26.

The information technology sector reached an all-time high while the communication sector touched its highest level since 2000 as artificial intelligence (AI) continued to dominate the market. AI enthusiasm, coupled with the upcoming rate cuts, will drive the stocks further higher in the second half. Strong corporate earnings will also provide strength (read: 5 ETF Predictions for the Second Half of 2024).

While there are several options to play on the bullish trends, we present five ETFs expected to benefit more than others given their solid fundamentals. These are Invesco AI and Next Gen Software ETF IGPT, Roundhill Magnificent Seven ETF MAGS, Schwab U.S. Large-Cap Growth ETF SCHG, Consumer Discretionary Select Sector SPDR Fund XLY and WisdomTree U.S. LargeCap Index EPS.

AI Boom

In order to tap the AI boom, several companies are investing huge sums in the technology sector and beyond. The expansion of AI applications holds the promise of ushering in fresh growth opportunities. According to a new report by Grand View Research, the global artificial intelligence market is expected to witness a CAGR (2024-2030) of 36.6% to reach $811.75 billion by 2030.

Though technology remains a popular play, utilities and commodities like copper and uranium remain an untapped area. Investors should consider investing in ETFs targeting this corner of the space or the broad AI plays (read: ETFs to Make the Most of the AI-Powered Utility Sector).

Upcoming Rate Cuts

The latest bouts of data point to a softening economy, injecting fresh hopes of rate cuts in September. The U.S. services sector contracted in June at the fastest pace in four years. Meanwhile, job growth was marginally slower in June, and the unemployment rate rose to a 2-1/2-year high. Wage gains also slowed. Per the CME’s FedWatch Tool, the probability of the U.S. central bank easing in September jumped to 79% from 66% before the jobs data.

Low rates reduce the cost of borrowing, which is often needed to finance the expansion of companies, thereby driving growth. This can positively impact sectors like real estate, consumer discretionary and financial services, which are typically sensitive to interest rate changes. In particular, growth stocks, with their potential for high returns, become more appealing to investors in this environment, driving up demand and, consequently, their prices.

Earnings Growth

The second-quarter earnings season picture is expected to be one of continued resilience coupled with a steadily improving outlook, per the Earnings Trends report. S&P 500 earnings are expected to be up 8.6% from the same period last year on 4.7% higher revenues. This will be the highest earnings growth rate since the 9.9% growth rate in the first quarter of 2022. Earnings growth for the Energy sector is on track to turn positive in the second quarter after remaining in negative territory over the preceding four quarters.

ETF Picks

Invesco AI and Next Gen Software ETF (IGPT)

Invesco AI and Next Gen Software ETF offers exposure to companies with significant exposure to technologies or products that contribute to future software development through direct revenues. It tracks the STOXX World AC NexGen Software Development Index and holds 101 stocks in its basket. Invesco AI and Next Gen Software ETF has amassed $385.7 million in its asset base and trades in volume of 73,000 shares a day on average. It charges 60 bps in fees per year from investors and has a Zacks ETF Rank #1 (Strong Buy) (read: Top-Ranked ETFs That Outperformed the Market in 1H).

Roundhill Magnificent Seven ETF (MAGS)

Roundhill Magnificent Seven ETF is the first-ever ETF that offers investors equal-weight exposure to the “Magnificent Seven” stocks. It has amassed $578.3 million in its asset base and charges 29 bps in fees per year. MAGS trades in an average daily volume of 200,000 shares (read: 5 Sector ETFs That Beat the Market in Q2).

Schwab U.S. Large-Cap Growth ETF (SCHG)

With an AUM of $31.2 billion, Schwab U.S. Large-Cap Growth ETF follows the Dow Jones U.S. Large-Cap Growth Total Stock Market Index. It holds 251 stocks in its basket, with a large concentration on the top three firms. From a sector look, information technology takes the top spot at 46.1% share, while communication services, consumer discretionary and health care receive double-digit exposure each in the portfolio. Schwab U.S. Large-Cap Growth ETF charges 4 bps in annual fees and sees an average volume of around 1.3 million shares a day.

Consumer Discretionary Select Sector SPDR Fund (XLY)

Consumer Discretionary Select Sector SPDR Fund offers exposure to the broad consumer discretionary space and tracks the Consumer Discretionary Select Sector Index. It holds 52 securities in its basket, with key holdings in broadline retail, hotels, restaurants and leisure, specialty retail, and automobiles with a double-digit allocation each. Consumer Discretionary Select Sector SPDR Fund is the largest and most popular product in this space, with AUM of $20 billion and an average daily volume of around 3 million shares. It charges 9 bps in annual fees and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

WisdomTree U.S. LargeCap Index (EPS)

WisdomTree U.S. LargeCap Index provides exposure to earnings-generating companies within the large-cap segment of the broad U.S. stock market by tracking the WisdomTree U.S. LargeCap Index. Holding 500 stocks in its basket, the fund is well spread out across a number of sectors, with information technology, financials, communication services and healthcare taking double-digit exposure each. The ETF has amassed $925.1 million in its asset base and charges 8 bps in annual fees. Volume is light, trading around 44,000 shares a day. EPS has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

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Consumer Discretionary Select Sector SPDR ETF (XLY): ETF Research Reports

WisdomTree U.S. LargeCap ETF (EPS): ETF Research Reports

Schwab U.S. Large-Cap Growth ETF (SCHG): ETF Research Reports

Roundhill Magnificent Seven ETF (MAGS): ETF Research Reports

Invesco AI and Next Gen Software ETF (IGPT): ETF Research Reports

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