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2 ETFs To Consider Buying (And 1 To Avoid) This Week

The delta variant could have an impact on the direction of tech, banks and REITs this week.

The July nonfarm payroll erased some investor fears that the recovery was slowing. GDP growth rates are still healthy, but labor market slack is the one thing that has still been a problem. We know that the Fed is using the unemployment rate as one of its primary benchmarks for economic health, so seeing the rate dive from 5.9% in June to 5.4% in July, its lowest mark since March 2020's reading of 4.4%, helps ensure that labor supply/demand is coming back into balance.

The one thing we didn't see change was the market's expectation that the Fed won't consider raising interest rates until late 2022 at the earliest, according to the Fed Funds futures market. For equities, that was good news, but Treasury yields spiked. Gold also sold off, so there was a definite pivot away from defensive positioning and towards risk assets.

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I've been cautious about the direction of the markets even though the S&P 500 and Nasdaq 100 were still hitting new highs, but big improvement in the labor market does calm some of those fears. If the economy continues to show progress in terms of both GDP growth and a lower unemployment rate while the Fed keeps conditions loose, there's a path for higher stock prices throughout the remainder of 2021.

There's two potential headwinds, however, before that narrative plays out - inflation and the government's resolution to the debt ceiling battle. We'll know more about the former when the latest July number is released on Wednesday. Expectations are for a slight tick down to 5.3%, but a reading below that could really go a long way in confirming that Fed's "transitory" narrative and be a real catalyst to send share prices higher.

With that being said, here are three ETFs I'm going to be watching this week and the narratives that go along with them.

Direxion Work From Home ETF (WFH)

source: ETF Action

source: ETF Action

The delta variant has become a real wild card for both the economy and the world in general. Even though daily case counts are soaring, it doesn't look like we're facing significant business closures in the same way we did in 2020. In fact, it doesn't look like it's on the table at all. That's good for the health of the U.S. economy, but it's looking like the return of the online economy and the work from home trend is imminent. Many companies are planning on extending the ability to work remotely for the foreseeable future until the delta variant (and any subsequent variants) have subsided.

WFH is one of the best ways to play this trend, which focuses on cloud technologies, cybersecurity, online project & document management and remote communications. In other words, all of the areas that will see strong demand from the work from home trend. WFH has outperformed the S&P 500 by about 6% over the past three months, so there's already some interest in this as an investment trend, but I feel there's some more upside to be had here.

iShares Core U.S. REIT ETF (USRT)

source: ETF Action

source: ETF Action

REITs have been one of the market's strongest performing sectors in 2021, but the group is facing an uncertain future. The residential housing market is still strong, but it appears that peak growth has now passed despite the continuation of ultra-low rates. If the delta variant of the coronavirus continues to spread, it could severely impact the business prospects of retail establishments, shopping malls, office buildings and anything else that could experience a drop-off in foot traffic.

USRT has a relatively heavy allocation in commercial REITs, so it's potentially exposed to some extra risk in the current environment. On the other hand, the 35% combined allocation to specialized and healthcare REITs could enjoy some relatively durable demand and the 14% allocation to industrial REITs could benefit the new trillion dollar infrastructure package. The 2.4% yield won't necessarily get income seekers excited, but the overall build of the portfolio still has some potential.

Invesco KBW Bank ETF (KBWB)

source: ETF Action

source: ETF Action

The financials sector has been highly dependent on the direction of interest rates and nearly nothing else. As interest rates have fallen, financial and bank stocks have steadily underperformed and vice versa. Last week, the financial sector got a boost from last week's spike in interest rates, gaining more than 3.5%, while bank stocks rose more than 4%. While the prospects for the financial sector may look a little more positive today than it did a week ago, it still all depends on interest rates.

That's where I'm a little less optimistic. We've seen these "micro spikes" in interest rates on multiple occasions since the March peak only to see them re-establish new lows shortly thereafter. Maybe there's some more strength in last week's move since it was a result of unexpected strength in the labor market, but I still believe that the 10-year yield is moving back towards 1%. The debt ceiling fight could be the catalyst or the effects of the $30 trillion of existing debt, but this has the look of just a temporary jump in interest rates. That means financial stocks could very well be heading right back down again.

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