Quantshare: Select Sector SPDRs: Time For The Spider Men To Change Their Webs

By Azouz Gmach

When it comes to portfolio diversification and sectoral investments, the nine select SPDRs (informally called spiders) based on the GICS (Global Industry Classification Standards) sectors of the S&P 500 turn out to be one of the best options for the investors. Select sector SPDRs are a group of nine sectoral ETFs managed by the State Street Global Advisors (SSgA). They are unique in the way they can be traded on the NYSE Arca throughout the market hours, have low expense ratio of 0.18 and together they represent all the ten sectors of S&P 500.

Sectors that constitute the S&P 500 can be categorized into two basic groups: the cyclical and the non-cyclical sectors. The non-cyclical sectors are conservative and defensive sectors. They have usually lower volatility and steady returns. Investors flock to these sectors under gloomy market conditions. This group includes Consumer Staples, Healthcare and Utilities. The other group consists of sectors which have strong correlation with the economic cycle.

If you look at the performance of the SPIDERS in the recent past, you will notice that the defensive sectors have done quite good. There has been good inflow of investments in these funds which in turn pushed up the valuations of these sectors quite high. But the months of May and June have seen signs of strengthening of the economy and investors moving into the riskier cyclical sectors. Also, the attractive valuations of the cyclical sector funds have led to a larger interest from the investors.

  1. The Consumer Discretionary Select Sector SPDR Fund – (XLY):- The valuations of the fund are quite high as of now. It is trading at a P/E of around 18, highest among all the nine SPIDERS. With lower upside prospects, this fund seems to be overbought. Returns have been good in the past but same will be tough to carry on. Better be little underweight on this sector.

  2. The Consumer Staples Select Sector SPDR Fund – (XLP):- One of the conservative sectors, it has been an outperformer in past 6 months or so. With the investors ready to take some risk in the cyclical, this fund may find it tough to maintain the growth in second half of 2013.

  3. The Energy Select Sector SPDR Fund – (XLE):- The energy sector seems to be quite lucrative at the moment. The fundamentals are good and valuations are low making it very attractive. The fund has performed poorly in 2012 but 2013 had a good start and the momentum is expected to continue in the second half as well. The shale gas & oil production boom throughout North America is going to be a big factor for the energy sector growth.

  4. The Financial Select Sector SPDR Fund – (XLF):- Though the financial sector has been an uncertain territory within the past few months, 2012 was a great year as far as returns are concerned. The fund largely consists of large banks & financial firms and the recovery in second half of 2013 is going to help the sector maintain the growth momentum.

  5. The Health Care Select Sector SPDR Fund – (XLV):- This is one of the conservative sectors and has done very well in the recent past. The sector is expected to maintain the growth momentum in 2013. US is one of the biggest healthcare markets and a religious rise in healthcare expenditure is a norm given the increasing number of ageing people. The sector still appears to be attractive.

  6. The Industrial Select Sector SPDR Fund – (XLI):- Industrial sector is one of the most important cyclical sectors. The fund has seen good growth and the next year is likely to be a better one. Shale gas revolution is helping the growth of this sector in a big way.

  7. The Materials Select Sector SPDR Fund – (XLB):- The basic material sector fund is witnessing heavy inflows of investments as the fundamentals are quite strong. The current year seems to be the one where chemicals, mining and metals are going to see huge spur in demands. The prospects are quite bullish for the fund.

  8. The Technology Select Sector SPDR Fund – (XLK):- The performance of this sector has been moderate in the past. Further growth in the sector will depend on the overall growth in the economy. If the second half of 2013 turns out to be a great phase for the economic growth, 2014 will be a year to watch out for the technology sector riding on the wave of higher corporate spending and better margins.

  9. The Utilities Select Sector SPDR Fund – (XLU):- This conservative sector characterized by low volatility, steady yields and good performance in dull market conditions, has been losing its sheen lately. The very fact that it is a defensive sector is going against it as the investors have started shifting to riskier cyclical-sectors with the increasing hopes of better economic conditions. The recent rise in bond yields have further led to the sector losing its appeal on dividend front. Time to go a little underweight on the fund

As the recovery in the domestic economy gets more pronounced and prospects become better, the cyclical sectors will be the one which will see better days so will be the investors who tweaked their portfolios and took riskier bets on these sectors. The time seems right for the Spider men to change their webs.

Disclaimer:- The article and the contained data are for general information purpose only and should not be used as a basis for investment or financial decisions. Neither the author nor the website will be responsible for any losses incurred to the reader.

Article contributed by QuantShare. An advanced technical/fundamental analysis software for serious traders.

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