Despite concerns about narrow market, the S&P 500 logged an amazing 15.7% first-half rally. The rally was driven by cost-cutting measures initiated by big tech stocks, a less-hawkish Fed, slowly falling inflation, a resilient U.S. economy, and optimism surrounding generative artificial intelligence (gen AI).

But this also means that many investors missed out on the rally due to a narrow market. However, according to BofA Global Research, there is still an opportunity to capitalize on the stock market's strength in the second half of 2023, as quoted on Morningstar.

Inside Narrow Market Rally in 1H

BofA's equity and quant strategists, led by Savita Subramanian, noted that only 25% of stocks outperformed the S&P 500 during the first six months of 2023, as quoted on Morningstar, making it the narrowest first-half breadth ever recorded.

This means that the gains in a few mega-cap stocks, including Apple, Microsoft, Google parent Alphabet, Amazon, Nvidia, Tesla and Meta Platforms led to the S&P 500 rally. These seven stocks made up more than a quarter of the S&P 500's market capitalization.

Equal-Weighted Opportunity Lingering in 2H?

While the market was led by a handful of stocks, BofA expects the breadth to continue to broaden in the second half of the year. Investors have already shown interest in equal-weighted ETFs, with the Invesco S&P 500 Equal Weight ETF (RSP Quick QuoteRSP - Free Report) experiencing inflows of around $4.69 billion in June, per etf.com.

This mainly happened because RSP has managed to rise 5.9% this year and is undervalued (RSP has a P/E of 16.14X) than the S&P 500 SPDR ETF (SPY) (has a P/E of 17.86X). Moreover, many are of the view that mega-cap tech stocks and Tesla are moving toward ripe valuation.

ETFs in Focus

Against this backdrop, below, we highlight a few ETFs that have a Zacks Rank #1 (Strong Buy) or 2 (Buy) and beat the S&P 500 in the past month (up 2.33%). These stocks have the potential to record a rally.

First Trust NASDAQ Transportation ETF (FTXR Quick QuoteFTXR - Free Report)

Zacks Rank: #2

Past Month Performance: Up 9.21%

Invesco Dynamic Building & Construction ETF (PKB Quick QuotePKB - Free Report)

Zacks Rank: #2

Past Week Performance: Up 4.6%

SPDR S&P Retail ETF (XRT Quick QuoteXRT - Free Report)

Zacks Rank: #1

Past Month Performance: Up 4.10%

First Trust Industrials/Producer Durables AlphaDEX ETF (FXR Quick QuoteFXR - Free Report)

Zacks Rank: #2

Past Month Performance: Up 3.52%

Vanguard Mid-Cap Value ETF (VOE Quick QuoteVOE - Free Report)

Zacks Rank: #1

Past Month Performance: Up 3.18%