4 ETFs and stocks to watch in July (2021)

Posted: 25 June 2021 5:15 pm

You may want to keep an eye on these stocks and ETFs in July as the US Fed eyes rate hikes.

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Major economies are seeing a lift in employment and consumer spending thanks to the successful rollout of vaccines across much of the developed world. That in turn is prompting investors to shift focus to key sectors that are likely to benefit from the economic recovery.

The rapid economic rebound has put the spotlight on the risk of inflation for the first time in years. In fact, US inflation data for the 12 months to May came in at 5%, higher than consensus estimates for 4.8%.

The US Federal Reserve has already signalled that it could raise interest rates by 0.5 basis points in 2023. Other major central banks (including Australia's) are likely to follow suit.

With interest rates set to rise, the bull run in growth stocks could finally be drawing to an end. When this happens, investors are expected to shift some of their portfolio out of growth stocks, such as technology, and into cyclical equities, such as financials and travel-focused stocks.

Based on insights from eToro market analyst Josh Gilbert, here are 4 stocks that are worth keeping an eye on in July.

JPMorgan Chase & Co (NYSE: JPM) - Sector: Financials

This US-based financial services company is the largest US bank by assets. Despite 2020 being one of the worst years for large banks, JPMorgan shares only fell 5.5% over the 12-month period, largely thanks to its diversified sources of revenue and a solid balance sheet. So far in 2021, they are up 17%.

Apart from a robust consumer banking business, it is also among the leaders in investment banking, asset and wealth management and commercial banking.

The bank will continue to benefit in the near term from the current reflationary environment, says eToro's Gilbert.

"JPMorgan Chase & Co are set to profit from IPOs and SPACs reaching record activity levels, especially since the investment bank saw its revenue soar by 222% year-over-year in its previous Q1 report," he said. This will also be reflected in its next earnings report due in July.

Earlier this month, JPMorgan Chase Chief Executive Jamie Dimon forecast that the bank's bond and equity trading division will make $6 billion in revenue this quarter, and its investment bank may report one of its best-ever quarters.

The bank is also holding around US$500 billion in cash, putting it in a position to benefit from higher interest rates.

Financial Select Sector SPDR ETF (NYSEARCA: XLF)

This one isn't actually a stock. Instead, it's an ETF that tracks a list of stocks.
As 10-year bond yields soar on the back of prospects for rising interest rates, financial services stocks and ETFs such as the Financial Select Sector SPDR Fund are back on the investor radar.

The fund provides exposure to an index that includes companies from the banking, capital markets, insurance, diversified financial services and consumer finance sectors. It counts Berkshire Hathaway, JPMorgan Chase & Co and Bank of America among its biggest holdings.

The ETF has already notched a 21% jump so far in 2021, but analysts are confident prospects are bright for further increases.

"The financial sector is still seen as undervalued after being out of favour for years. It will benefit the most from higher bond yields, and most stocks will also look to resume their dividends soon, which were previously paused in 2020," eToro's Gilbert says.

US Global Jets ETF (NYSEARCA: JETS) - Sector: Travel

Nearly half the US population has received at least one vaccine shot. In the United Kingdom, that number is near 70%, while the equivalent proportion in Germany, France and Italy stands near 50%.

As vaccines continue to be rolled out worldwide, travel is on everyone's minds again. Over 2 million people passed through US airport security checkpoints on 11 June – the first time that number was crossed since the pandemic began. There has also been a surge in spending on car rentals and hotels compared to last year.

Many investors are turning to airline stocks as a way to bet on the broad recovery of an industry that was among the hardest hit by the coronavirus pandemic. An airlines sector exchange traded fund such as the US Global Jets ETF is the best option to benefit from the pent-up consumer demand.

The passively managed Jets ETF offers investors exposure to the airline industry with holdings such as Delta Airlines, United Airlines and Ryanair. It also includes airline manufacturers such as Boeing as well as airports including Sydney Airport.

And with assets under management of nearly US$4 billion, it is one of the largest ETFs looking to imitate the performance of the transportation/shipping sector index.

"The ETF is up around 19% year-to-date, and with the substantial numbers coming out of US airports, we can expect to see this benefit the airlines moving forward," says Gilbert.

JETS counts United Airlines Holdings, American Airlines Group and Southwest Airlines Co among its biggest holdings.

Adobe Inc. (NASDAQ: ADBE) - Sector - Technology

Although investor focus is now shifting to cyclical sectors, there is still potential in big-name technology stocks with solid balance sheets and strong earnings growth.

Shares in Adobe hit an all-time high last week after the software maker posted a solid Q2 earnings report. The company reported a 23% rise in annual revenue to US$3.84 billion and also beat expectations for earnings per share.

"When looking at any tech stocks in this environment, investors need to ensure these stocks have clean balance sheets and are highly profitable, and that's what Adobe can offer," says eToro's Gilbert.

Until a few years ago, Adobe was primarily known for its photo and video editing software, but it has now turned into one of the biggest providers of software for digital marketing.

Its digital-media business is seeing a 25% revenue growth annually, driven by increased adoption of its Creative Cloud and Document Cloud solutions. The digital-experience business, which includes marketing and analytics products, has a similar rate of growth.

"Enterprise software spending is expected to grow by 10.8% in 2021, and we can expect Adobe to benefit from this. After this solid Q2 report, we can expect to see the momentum continue for the rest of the year if businesses continue to spend as expected post-pandemic," Gilbert said.

Rising earnings boosting sentiment

Overall, earnings estimates continue to rise across the US and Europe as restrictions are lifted and more countries reopen. Assets that are more sensitive to the reopening will benefit from this. In particular, consumer cyclical companies are seeing earnings grow as GDP numbers lift.

Gilbert says US and European markets could witness slightly different outlooks, based on the composition of their stock indices. For instance, the S&P 500 index has been an outperformer over the last 5 years, thanks to the heavy weightage of technology stocks.

On the other hand, the Euro Stoxx 600 has lagged over the last few years. But its heavy reliance on sectors such as food, beverage, banks and services – which are expected to perform better through the economic re-opening – would make it more attractive for investors.

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