Stocks to Correct 5-10% in 2021? Buy These ETFs

The S&P 500 and the Nasdaq have been near all-time highs despite a disappointing jobs report, soaring COVID-19 cases and the Fed’s taper talks. Miller Tabak chief market strategist Matt Maley raised a warning sign against such stock market behavior, as quoted on CNBC.

Per the article, Maley believes that today’s market bubble is similar to “red flags during the 1999-2000 and 2007-2008 peaks. During the dotcom bubble, for example, he says stocks shot sky-high no matter the fundamentals much like AMC and GameStop (NYSE:GME) have this year.”

He indicated that the QQQ Nasdaq 100 ETF now trades at a 70% premium to its 200-week moving average, pretty higher than where it was before the last few corrections. Another market watcher warns there's a “fair chance” that stocks may decline 25%, as quoted on businessinsider.com.

A consensus in a September market sentiment survey published by Deutsche Bank (DE:DBKGn) lately indicated that an equity market correction of 5-10% by the end of the year is likely, as quoted on Reuters. According to the report, conducted from Sep 7-9 and covering over 550 market professionals globally, 58% of respondents expect an equity selloff by the year-end.

While such predictions may go wrong and stocks may soar if the COVID-19 crisis is handled efficiently, overvaluation concerns do remain. This is especially true given that the earnings estimates of the S&P 500 components are showing signs of a slowdown. The magnitude of positive third-quarter estimate revisions is notably below what we had seen in the comparable periods of the last three earnings seasons. The Delta variant can be held responsible for the loss of momentum.

If this was not enough, two senior U.S. Senate Democrats recently forwarded a proposal to levy a 2% excise tax on corporate stock buybacks to finance President Joe Biden's $3.5 trillion domestic investment plan. Per the Democrats, such a move would force companies to shell out more on workers and less on share repurchases (which normally boost stock prices).

Against this backdrop, below we mention a few ETFs that carry a Zacks Rank #2 (Buy) or 1 (Strong Buy), lagged the S&P 500 year-to-date returns by about 20% and has a P/E lower than the S&P 500 ETF SPY’s 22.20X.

ETFs in Focus

SPDR S&P Biotech ETF XBI – Down 6.52%; P/E: 14.77X

Things have turned bullish for the biotech space of late. The pandemic triggered a race to introduce vaccines and treatment options, opening up investing opportunities in the biotech sector. The FDA’s first full U.S. approval to Pfizer (NYSE:PFE) /BioNTech’s (BNTX) coronavirus vaccine, Comirnaty (BNT162b) has brought optimism to the space. Moreover, a Reuters report stated that the U.S. government recently announced plans to make COVID-19 vaccine booster shots available starting Sep 20.

Materials Select Sector SPDR ETF XLB – Up 18.11% YTD; P/E: 17.28X

The gradual reopening of the economy and the $1 trillion worth of infrastructure bill are positives. Infrastructure and industrial activities will definitely require materials and thus the sector will emerge as yet another beneficiary. Plus, higher pent-up demand and an improving labor market should boost the inflationary pressure and increase the price of materials.

Vanguard High Dividend Yield ETF VYM – Up 18.21% YTD; P/E: 18.20X

With the 10-year Treasury yield crossing the S&P 500 dividend, income-loving investors would definitely look for other better options. VYM yields 2.77% currently. Plus, the dividend payout scenario has also improved within corporate America (read: Is Taper-Tantrum Looming Ahead? 6 ETF Plays).

iShares Currency Hedged MSCI Japan ETF HEWJ – Up 16.99% YTD; P/E: 16.77X

After underperforming for several months, Japan stocks have gained momentum lately on hopes of a stronger government ahead of a ruling party leadership race and a general election in November. The resignation of Prime Minister Yoshihide Suga has opened the door for the new government, which will likely unveil an economic package to support pandemic-hit businesses and families. As such, the move has spurred bets for strong economic recovery by the end of the year. Notably, the Japan Topix Index climbed to the highest level since April 1991 and has been outperforming its Asian peers in recent weeks.

Tech IPOs With Massive Profit Potential

In the past few years, many popular platforms and like Uber (NYSE:UBER) and Airbnb finally made their way to the public markets. But the biggest paydays came from lesser-known names.

For example, electric carmaker X Peng shot up +299.4% in just 2 months. Think of it this way…

If you had put $5,000 into XPEV at its IPO in September 2020, you could have cashed out with $19,970 in November.

With record amounts of cash flooding into IPOs and a record-setting stock market, this year’s lineup could be even more lucrative.