3 Must-Have ETFs Set to Dominate This Quarter

Key Points

• Three areas in the market could clearly command a rotation in the coming quarter, backed by economic tailwinds and themes.
• Recent data indicates that the market is shifting focus to these areas, as noted by Goldman Sachs analysts.
• Wall Street analysts seem to be ahead of the turn by boosting some stocks in this space.

The first quarter of 2025 is already underway, and investors across the market are probably wondering where the best place to put their capital to work is. With this in mind, a few economic and fundamental themes will point out a clear path to a particular area of the market that poses a potential gold mine for the coming months. Through diversification and fundamental tailwinds, these are names that investors want to keep.

Though there are individual stocks worth mentioning in each of these areas, diversification away from the potential volatility that might come in the markets is also a key factor to keep in place for portfolios moving forward. This is why the work will start with exchange-traded funds (ETFs) that offer this safety and also the broader diversification that investors need during volatile environments like today.

For reasons that will become clear in just a bit, investors will want to keep an eye on interest rate sensitive ETFs like the iShares 20+ Year Treasury Bond ETF NASDAQ: TLT for a potential run out of large-cap stocks and into bonds during volatility spikes and shifts in the inflation views for the economy. Then, two sectors deserve some attention today, the Energy Select Sector SPDR Fund NYSEARCA: XLE and the Industrial Select Sector SPDR Fund NYSEARCA: XLI.

Why Bonds Could Outperform This Quarter

Analysts at Goldman Sachs mentioned that the broader S&P 500 could see some tail risks realized this year, all inside their 2025 macro outlook report, but then they also mentioned how a rotation could be made into bonds for economic and risk-to-reward reasons.

With this in mind, it would become clear that the current bond yields are pricing not only United States GDP growth above economist forecasts but also inflation rates that aren’t currently justified by data releases, making today’s price a great place for investors to start looking for upside in bonds.

More than that, President Trump has also expressed his intentions to bring interest rates lower, which would not only help reduce the interest payments burden on the national debt, but also create a friendlier environment for businesses to operate under.

Considering that the latest manufacturing PMI report showed the first expansion in over 28 months, it looks like businesses in the manufacturing sector are already starting to prepare for this potential shift, and investors need to also consider it for their positions and portfolios.

More Domestic Activity Will Call on Oil

Understanding that the current spikes in manufacturing activity will also bring about a breakout of domestic demand and trade activity, investors can connect the dots to the effects that tariffs will have on certain stocks as a reaction to the shift away from international trade and into a domestic capacity and supply chain.

What this will do is not only create demand for transporting goods within the United States, but also demand for making the products themselves, which all calls for oil demand altogether. From these themes, it is clear why Warren Buffett decided to buy up to 29% of Occidental Petroleum Co. NYSE: OXY ahead of the breakout.

That is also why professional money managers and traders like Paul Tudor Jones recommended oil as a buy in a recent CNBC interview. The path is clear for investors to start looking into a potential breakout in oil stocks, though not all of them are made equal.

When going up in the value chain, this entire thesis would point to shares of Transocean Ltd. NYSE: RIG being one of the best setups in the industry, offering over 100% upside from today’s prices. This entire rotation doesn’t stop here, though, as another sector will be a key player in bringing it all together.

Manufacturing Stocks Will Dominate

Of course, production needs to take place in order to supply the domestic and international trade demand themes. This is where manufacturing stocks in the United States come into play, especially those that are net exporters.

That’s why short sellers have decided to close some of their positions in names like Caterpillar Inc. NYSE: CAT, as seen in the 7.9% short interest decline over the past month alone. Wall Street analysts have kept a $163.1 consensus price target on Nucor Co. NYSE: NUE as part of the steel exporting industry.

Most gauges are set in place for these three areas to deliver investors with the sort of upside they need to raise their first quarter performance to par with the rest of the year.