Wall Street had a strong start to 2022, but faltered in a few days on rising yields and the raging Omicron variant of COVID-19. However, a still improving economy backed by job growth and higher consumer confidence will likely bolster risk-on trade.

Against this backdrop, investors should stock up some ETFs from different zones that are poised to outperform in 2022 given the current trends. These include Vanguard Value ETF (VTV Quick QuoteVTV - Free Report) , Materials Select Sector SPDR (XLB Quick QuoteXLB - Free Report) , SPDR S&P Regional Banking ETF (KRE Quick QuoteKRE - Free Report) , Vanguard Dividend Appreciation ETF (VIG Quick QuoteVIG - Free Report) and iShares Core S&P Small-Cap ETF (IJR Quick QuoteIJR - Free Report) . These funds have a Zacks ETF Rank #1 (Strong Buy) or 2 (Buy), suggesting their outperformance.

Current Trends

Omicron cases are surging in the United States with more than a million new cases in a single-day and hospitalizations hitting new highs.

The 10-year Treasury yield hit a two-year high on bets that the Federal Reserve could raise interest rates as soon as in March. The latest Fed minutes revealed policymakers’ concerns about worsening inflation and early interest rate hikes to combat rising inflation. The policymakers signaled three rate increases this year and three in the following year as inflation concerns deepened. The probabilities of a March interest rate hike of 0.25% surged to 72%, according to fed futures trading contracts.

Higher yields indicate investors’ optimism in the economy that has encouraged a flight to cyclical sectors like energy, financials, materials and industrials, rotating out of the high-growth sectors like technology. As the cyclical sectors are tied to economic activities, these outperform when economic growth improves (read: Treasury Yields Jump to Start New Year: ETFs to Play).

Increased U.S. consumer confidence, suggests that the economy would continue to expand in 2022. Additionally, President Biden’s administration took steps to eliminate supply-chain bottlenecks, indicating that higher inflation will not last very long. Further, the wider spread of vaccinations, new vaccines as well as solid corporate earnings bode well for the economy and thus the stock market.

We have profiled the above-mentioned ETFs in detail below:

Value – Vanguard Value ETF (VTV Quick QuoteVTV - Free Report)

Value stocks have proven to be outperformers over the long term and are less susceptible to the trending markets. These stocks have strong fundamentals — earnings, dividends, book value and cash flow — that trade below their intrinsic value and are undervalued. These have the potential to deliver higher returns and exhibit lower volatility compared with their growth and blend counterparts.

Vanguard Value ETF targets the value segment of the broad U.S. stock market and follows the CRSP US Large Cap Value Index. It holds 347 stocks in its basket with AUM of $94.1 billion and charges 4 bps in annual fees. Vanguard Value ETF trades in volume of 2.9 million shares per day on average and has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.

Materials - Materials Select Sector SPDR (XLB Quick QuoteXLB - Free Report)

With prices for various types of materials on the rise, the material sector will continue to witness solid growth. Additionally, a tight policy means solid economic growth, which in turn results in higher demand for materials. Materials Select Sector SPDR is the most popular material ETF that follows the Materials Select Sector Index. It manages about $8.5 billion in its asset base and trades in volumes as heavy as around 6 million shares. Materials Select Sector SPDR holds about 28 securities in its basket and charges 12 bps in fees per year from its investors.

In terms of industrial exposure, chemicals dominates the portfolio with 69% share, while metals & mining and containers & packaging round off the top three positions. The product has a Zacks ETF Rank #1 with a Medium risk outlook (read: 5 Sector ETFs to Bet on Ahead of Q4 Earnings).

Banks - SPDR S&P Regional Banking ETF (KRE Quick QuoteKRE - Free Report)

A rising rate environment is highly beneficial for the financial sector, especially banks. As banks seek to borrow money at short-term rates and lend at long-term rates, the rise in interest rates will earn more on lending and pay less on deposits, leading to a wider spread. This will expand net margins and increase banks’ profits. SPDR S&P Regional Banking ETF provides exposure to the regional banks segment by tracking the S&P Regional Banks Select Industry Index. It holds 140 stocks in its basket with each accounting for no more than 2% of the assets.

SPDR S&P Regional Banking ETF has AUM of $5.9 billion and charges 35 bps in annual fees. It trades in an average daily volume of 8.8 million shares. SPDR S&P Regional Banking ETF has a Zacks ETF Rank #2 (Buy) with a High risk outlook (read: Count on Bank ETFs as Rates Rise).  

Dividend - Vanguard Dividend Appreciation ETF (VIG Quick QuoteVIG - Free Report)

The dividend-paying securities are the major sources of consistent income for investors when returns from the equity market are at risk. This is especially true as these stocks offer the best of both these worlds — safety in the form of payouts and stability in the form of mature companies that are less volatile to large swings in stock prices. The companies that offer dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis.

Vanguard Dividend Appreciation ETF is the largest and the most popular ETF in the dividend space with AUM of $69.2 billion and average daily volume of 1.7 million shares. The fund follows the S&P U.S. Dividend Growers Index, which is composed of high-quality stocks that have a record of growing their dividends year over year. Vanguard Dividend Appreciation ETF holds 268 securities in the basket with none accounting for more than 5% share. The fund charges 6 bps in annual fees and has a Zacks ETF Rank #1 with a Medium risk outlook

Small-Caps - iShares Core S&P Small-Cap ETF (IJR Quick QuoteIJR - Free Report)

Small caps, which are generally more cyclical stocks, tend to outperform when the economy is healthy and growing. Consumer confidence is stronger than expected, hiring has been picking up and wages are rising. Additionally, rising rates will boost U.S. dollar and favor small-cap stocks, which are more domestically exposed. iShares Core S&P Small-Cap ETF offers exposure to U.S. small-cap stocks and follows the S&P SmallCap 600 Index.

iShares Core S&P Small-Cap ETF holds 680 stocks in its basket with key holdings in financials, industrials, information technology, consumer discretionary and healthcare that account for a double-digit exposure each. iShares Core S&P Small-Cap ETF has AUM of $75.8 billion and trades in an average daily volume of 4.1 million shares. The product charges investors 6 bps in annual fees.