4 Index Funds I Predict Will Beat the Market in 2022

Stocks broadly are off to a rocky start this year. Most of the price weakness stems from investors’ worries that rising interest rates will finally put the kibosh on the long-lived rally — a rally that even managed to shrug off the potent initial impact of the COVID-19 pandemic. And those concerns aren’t entirely unreasonable.

This dynamic, however, doesn’t mean you should move your money out of the stock market altogether. It simply means you may want to consider how you remain in it. Certain environments favor some sorts of stocks, while other market environments are better for other kinds of equities.

With that idea in mind, here are four index-based exchange-traded funds that I expect will fare better than the broad market in 2022.

iShares S&P 500 Value Fund

Here’s a premise that’s been repeatedly suggested for the past few years, and wrong the whole time: “It’s time for value stocks to shine.”

This is the year, however, where value stocks really are likely to outperform a market that’s been mostly led by growth names. The easiest and most accessible way to plug into this shift is the iShares S&P 500 Value Fund (NYSEMKT: IVE), which is built to reflect the performance of the S&P 500 Value Index.

Simply put, most value companies are better equipped to handle inflation than growth companies. Not only are the value index’s constituents — names like Johnson & Johnson, Procter & Gamble (NYSE: PG), and Chevron — able to pass along their increased expenses to customers, when interest rates rise, the higher cost of borrowing money for debt-financed expansion disproportionately impacts growth companies.

P&G’s fiscal Q2 2022 results — which it posted on Wednesday — underscore this idea. Though it instituted several price increases over the last year, P&G’s sales for the period, which ended Dec. 31, were up 6%, topping estimates and prompting the consumer staples company to raise its fiscal year sales guidance. Half of last quarter’s sales growth was the result of higher prices its customers were clearly willing to pay.

Consumer Staples Select Sector SPDR ETF

While value indexes will include many consumer staples players like Procter & Gamble that are able to adapt to an inflationary environment, a little extra exposure to the consumer goods arena might not be a bad idea this year either. Consider the Consumer Staples Select Sector SPDR ETF (NYSEMKT: XLP). It tracks the Standard & Poor’s Consumer Staples Select Sector Index, consisting of companies like the aforementioned P&G, Coca-Cola, tobacco giant Altria, Walmart, and Colgate-Palmolive, just to name a few. These companies make and sell the products people keep buying fairly steadily in almost any economic environment.

Image source: Getty Images.

Sure, the consumer staples space has underperformed other sectors since 2017, and the companies in it have collectively been particularly poor performers since the market came out of its early 2020 tumble. That’s the point, though. These stocks have relatively less to offer investors in a stimulus-supported, high-growth, low-inflation setting. This setting is changing, though — almost reversing itself in most regards.

Invesco Dynamic Leisure and Entertainment ETF

Admittedly, it’s a little counterintuitive to suggest consumer staples stocks are primed for leadership due to the developing adverse environment and then turn around and suggest that consumers are ready, willing, and able to spend on having fun. But that is the present situation.

Think critically about the economic recovery. The world is on the mend and wages are growing, but incomes are barely keeping up with inflation. Household debt — credit card debt in particular — is on the rise. Yet after nearly two years’ worth of a pandemic that has made it tough to fully enjoy life, people are starting to throw caution to the winds. For example, the American Gaming Association reports the U.S. gambling industry’s revenue had reached record-breaking full-year levels by the end of November. And despite a slowdown in December relative to November’s figures, spending on shopping and dining in the United States last year hit a record $5.3 trillion, Consumers are loosening their purse strings and opening their wallets, even if they can’t quite afford to.

That trend bodes well for the Invesco Dynamic Leisure and Entertainment ETF (NYSEMKT: PEJ), which is meant to reflect the performance of the Dynamic Leisure & Entertainment Intellidex Index. Some of its top holdings include online travel agent Booking Holdings, Walt Disney, and Live Nation Entertainment.

SPDR S&P Transportation ETF

Finally, add the SPDR S&P Transportation ETF (NYSEMKT: XTN) to your list of funds positioned to beat the market this year.

The rebound from the COVID-19 contraction has been a complicated one, and it has been made even trickier by the resulting supply chain crisis. As it turns out, however, the bottlenecks are at least as much due to a lack of sufficient shipping capacity as they are to businesses’ inability to manufacture products. This shortage of capacity has proven a boon to air cargo carriers, maritime shipping services, and land-based delivery outfits, even though most of these industries were anything but ready to handle COVID-19’s impact. Now they’re struggling to deal with the subsequent surge in demand created by the recovery from the prior lull. That demand — and the pricing power they accrue due to it — isn’t expected to abate in 2022.

At the same time (and in light of all the recent disruptions), the logistics business is evolving. Companies are moving away from a just-in-time approach to procuring supplies and adopting more of a just-in-case mindset. Meanwhile, consumers — who used to be happy to regularly shop at the centralized distribution locations that brick-and-mortar retailers are — now increasingly expect more of their purchases to be delivered straight to their doors. This is the year that all the investments in so-called “last mile” delivery capabilities will really begin to pay off. It’s also the first year that most logistics service providers are prepared to help retailers make that happen in a meaningful way.

The SPDR S&P Transportation ETF has balanced exposure to every aspect of this paradigm shift. With a portfolio modeled on the S&P Transportation Select Industry Index, the fund’s biggest holdings range from maritime shipping outfit Kirby to airline Southwest to trucking company Schneider National to ride-hailing name Uber Technologies. As such, it offers investors a balanced mix of all the slivers of an old-school sector that’s become surprisingly modern and relevant.

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James Brumley has no position in any of the stocks mentioned. The Motley Fool owns and recommends Booking Holdings and Walt Disney. The Motley Fool recommends Johnson & Johnson, Live Nation Entertainment, Southwest Airlines, and Uber Technologies and recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.

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