State Street’s Sector Picks For 2016

December 30, 2015

This month, State Street Global Advisors released its “2016 ETF & Investment Outlook.” caught up with one of the report’s authors, David Mazza, vice president and head of research for SPDR ETFs and SSgA funds, to discuss some of the sectors the firm believes will perform better than others. Let’s talk about why you like the regional banking sector and the SPDR S&P Regional Banking ETF (KRE | A-65) as one of your sector ETFs that investors should consider.

Dave Mazza: When you have low energy prices—particularly low oil—coupled with robust job growth, you find there are certain opportunities. We think regional banks are one of them. They benefit from a more localized economic improvement, since their revenue streams are more local, not necessarily national. When you're actually in the early part of a tightening cycle, higher rates can help with profit margins.

There's a question mark, because short-term rates are moving, and long-term rates may not necessarily move higher. Even with that, though, we expect demand to improve. We’re not just relying on the net interest margin stories; we think there will be increasing demand for home loans and increasing demand for auto loans, as this recovery really moves towards the consumer. Do you see regional banks outperforming big national banks like Citibank, J.P. Morgan and Bank of America?

Mazza: We think regional banks remain a better way to access the recovery than broad-based financials, because many of the major banks still have some pressure from the regulatory environment. The legal environment may be beginning to improve for them, but the regulatory environment—Basel III, Dodd-Frank—continues to weigh on sentiment on those stocks.

Plus, many of the major banks have trading operations. And while we would expect volatility to increase, we know trading of individual equities and in the bond market continues to remain subdued, which impacts them to a much greater extent than what you’d find with regional banks. Your forecast of an increase in demand for mortgages segues into another sector that you highlighthomebuilding, and in particular, the SPDR S&P Homebuilders ETF (XHB | A-44).

Mazza: Those ideas are interconnected. A big part of what we’ve heard for the past few years is a lot of positive sentiment on consumer discretionary names. In some cases, they’re no longer as attractively valued as they once were.

We think a better way to play the consumer is with homebuilders in the housing-related sector. Funds like XHB are more second-derivative housing plays. They're more of your Home Depot or Lowes, where, when someone purchases a first-time home, six months later they're out filling rooms or doing home improvement projects. We think many of those particular companies stand to benefit heading into 2016.

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