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U.S. stocks are on track for the worst first half of the year in more than 50 years. Persistent high inflation and an economic downturn caused by a hawkish Fed continued to weigh on investor sentiment. This has made the stocks cheaper, compelling investors to buy the dip.

Using our database, first, we have selected ETFs with a Zacks Rank #1 (Strong Buy) or 2 (Buy). This is because these ranks suggest strengthening fundamentals and superior weighting methodologies that could allow them to lead higher than their cousins in a booming market. Then, we narrowed down the list to funds having a lower P/E ratio than 21.7 for the broad market fund SPY.

We have highlighted five ETFs from different zones of the market that are currently undervalued and could generate solid returns in a rising stock market. These are Invesco S&P SmallCap Energy ETF (PSCE - Free Report), U.S. Global Jets ETF (JETS - Free Report), First Trust Financials AlphaDEX Fund (FXO - Free Report), Invesco DWA Healthcare Momentum ETF (PTH - Free Report) and Invesco S&P MidCap Value with Momentum ETF (XMVM - Free Report).

With a few trading days left to end the first half, the S&P 500 is down about 18% as the Fed tightens monetary policy in its fight against the highest inflation in decades. An increase in interest rates means higher loan rates for consumers and businesses, including mortgages, credit cards, and auto loans which will likely cut consumer spending, thereby hurting economic growth.

However, many market researchers project a strong recovery in the stock market based on historical data. Per LPL Financial, sharp falls in stocks have often been followed by steep rebounds. The past years in which the S&P 500 was down at least 15% at the midway point saw the final six months higher every single time, with an average return of nearly 24%.

The trend might come true as the S&P 500 jumped more than 6% last week, its first weekly advance since late May and its second-best week of 2022 to date. The latest comments from Fed officials buoyed up the sentiment on the economy and reading on inflation expectations eased. Federal Reserve Chair Jerome Powell, in his testimony, has committed to bringing inflation down. He said that economic conditions are generally favorable, pointing to a strong labor market and high demand.

Additionally, the initial phase of the rate increase will be good for stocks as it will reflect an improving economy, thereby benefiting cyclical sectors like financials, technology, industrials, and consumer discretionary.
 

ETFs to Buy

Invesco S&P SmallCap Energy ETF (PSCE) – P/E Ratio: 3.72

Invesco S&P SmallCap Energy ETF offers exposure to the companies that are principally engaged in producing, distributing, or servicing energy-related products, including oil and gas exploration and production, refining, oil services, and pipelines. It tracks the S&P Small Cap 600 Capped Energy Index, holding 29 stocks in its basket.

Invesco S&P SmallCap Energy ETF has accumulated $140 million in its asset base and charges 29 bps in annual fees. It trades in an average daily volume of 476,000 shares and gas a Zacks ETF Rank #2.
 

U.S. Global Jets ETF (JETS) – P/E Ratio: 4.32

U.S. Global Jets ETF provides exposure to the global airline industry, including airline operators and manufacturers from all over the world, by tracking the U.S. Global Jets Index. The product holds 51 securities and charges 60 bps in annual fees.

U.S. Global Jets ETF has gathered $2.6 billion in its asset base while seeing a heavy trading volume of nearly 6 million shares a day. JETS has a Zacks ETF Rank #2.

First Trust Financials AlphaDEX Fund (FXO) – P/E Ratio: 8.01

First Trust Financials AlphaDEX Fund targets the broad financial sector and follows the StrataQuant Financials Index, which employs the AlphaDEX stock selection methodology to select stocks from the Russell 1000 Index. Holding 100 stocks in its basket, the ETF has amassed $1.1 billion and charges 61bps in annual fees.

First Trust Financials AlphaDEX Fund trades in an average daily volume of 275,000 shares and has a Zacks ETF Rank #2.
 

Invesco DWA Healthcare Momentum ETF (PTH) – P/E Ratio: 8.86

Invesco DWA Healthcare Momentum ETF follows the Dorsey Wright Healthcare Technical Leaders Index and holds a basket of 43 U.S. companies. It has an AUM of $234.7 million and charges 60 bps in annual fees. Healthcare providers and services take the largest share at 30.7%, while biotechnology and pharmaceuticals round off the next two with double-digit exposure each.

Invesco DWA Healthcare Momentum ETF trades in a light average daily volume of 16,000 shares and has a Zacks ETF Rank #2.
 

Invesco S&P MidCap Value with Momentum ETF (XMVM) – P/E Ratio: 10.77

Invesco S&P MidCap Value with Momentum ETF follows the S&P MidCap 400 High Momentum Value Index, which is composed of securities in the S&P MidCap 400 Index having both the highest value scores and momentum scores. It holds 80 stocks in its basket with key holdings in financials, consumer discretionary, industrials, and materials.

Invesco S&P MidCap Value with Momentum ETF has accumulated $218.6 million in its asset base while trading in a volume of 45,000 shares per day, on average. The fund charges 39 bps in annual fees and has a Zacks ETF Rank #2.