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Small caps

While Subramanian doesn’t find the large cap-focused S&P 500 attractive at the moment, she sees opportunity in the small-cap space.

“If you think about the small-cap benchmark, it is pricing in a hard landing, deep, deep recession,” she says.

“We think they’re going to be okay. We think we’re going to get a recession, but it’s going to be a softer landing.”

Investors can use ETFs to get exposure to small-cap companies. Funds like the Vanguard S&P Small-Cap 600 ETF (VIOO) and the iShares Russell 2000 ETF (IWM) could provide a good starting point for further research.

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Energy

Subramanian has long been bullish on energy.

“I would look for sectors that benefit from a still-very high inflationary backdrop. I would buy energy,” she says.

While rampant inflation has cast a giant shadow over the stock market, energy stocks have been firing on all cylinders.

In fact, energy was the S&P 500’s best-performing sector in 2021, returning a total of 53% vs the index’s 27% return. And that momentum has carried into 2022.

Year to date, the Energy Select Sector SPDR Fund (XLE) is up a solid 35%, in stark contrast to the broad market’s double-digit decline.

‘Select industrials’

Unlike energy, the industrial sector hasn’t been a market favorite. But Subramanian sees a revival on the horizon.

“I would buy select industrials that could benefit from a CAPEX cycle that we are seeing underway,” she says. “Everybody's moving companies back to the U.S., it’s going to benefit the traditional industrial companies from a more traditional CAPEX cycle rather than spending on tech.”

To be sure, Subramanian is talking about “select industrials.”

So how do you choose? The key lies in automation.

“I think the best place to be within the industrial complex are some of the automation plays because if you think about it, that’s where companies are spending money.”

Subramanian explains that inflation is happening in the labor market as well.

Therefore, as companies bring jobs back to the U.S., they are “incented to automate more of the processes” compared to when they could just “offshore and pay for super cheap labor” in other countries.

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Healthcare

Healthcare serves as a classic example of a defensive sector thanks to its lack of correlation with the ups and downs of the economy.

At the same time, the sector offers plenty of long-term growth potential due to favorable demographic tailwinds — particularly an aging population — and plenty of innovation.

Subramanian finds the sector attractive.

“I think healthcare looks great, it’s got a lot of free cash flow yield,” she says.

Average investors might find it difficult to pick out specific healthcare stocks. But healthcare ETFs can provide a diversified way to gain exposure to the space.

Vanguard Health Care ETF (VHT) gives investors broad exposure to the healthcare sector.

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Jing Pan Investment Reporter

Jing is an investment reporter for MoneyWise. He is an avid advocate of investing for passive income. Despite the ups and downs he’s been through with the markets, Jing believes that you can generate a steadily increasing income stream by investing in high quality companies.

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