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David England: A slice of the pie?
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Column | Eye on the Market

David England: A slice of the pie?

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Today, I introduce you to the nine main sector groups then audit their performance ($SPX) since the March 2020 bottom. Why? To identify funds that are outperforming and underperforming the market for future portfolio considerations.

For those unfamiliar with sectors, imagine the US market as a large pizza with nine various-sized slices, representing the main groups of businesses in our US economy. Why? Money goes from one sector to another depending on where we are in market cycles, essential for your investment and trading strategies.

The technology and consumer discretionary sectors are usually the leaders at the beginning of a bull run in the stock market. The top of many market cycles is led by basic materials and energy, sectors benefiting from a rise in demand when economies expand. When the market peaks, it is followed by a contraction in the economy, helping utilities and consumer staples-stuff people must buy. Then, the market bottoms, and the cycle repeats itself.

Here are the most popular eleven S&P Sector SPDR, sorted by size, assets under management (AUM), and daily trading volume: 

XLK-Technology Select Sector SPDR ETF tracks the companies in the Technology Select Sector Index. XLK is the largest fund in the group with AUM-Assets under management of 37.34 billion with an average daily volume of 8.64 M.

XLF- Financial Select Sector SPDR ETF tracks companies in the Financial Select Sector Index. XLF has assets of 34.38 billion with the highest average daily volume in this group of 62.98 M.

XLV-Health Care Select Sector SPDR ETF companies in the Health Care Select Sector Index. XLV has assets of 24.05 billion with an average daily volume of 8.73 M.

XLE-Energy Select Sector SPDR ETF tracks companies in the Energy Select Sector Index. XLE has assets of 20.45 billion with an average daily volume of 34.67 M.

XLY-Consumer Discretionary Select Sector SPDR ETF tracks companies in the Consumer Discretionary Select Sector Index. XLY has assets of 18.78 billion with an average daily volume of 4.148 M.

XLI-Industrial Select Sector SPDR ETF tracks companies in the Industrials Select Sector Index. XLI has assets of 16.73 billion with an average daily volume of 12.73 M.

XLU-Utilities Select Sector SPDR ETF tracks companies in the Utilities Select Sector Index. XLU has assets of 10.59 billion with an average daily volume of 12.43 million.

XLP-Consumer Staples Select Sector SPDR ETF tracks companies in the Consumer Staples Sector Index. XLP has assets of 10.19 billion with an average daily volume of 13.16 M. 

XLB-Materials Select Sector SPDR ETF tracks companies in companies in the Materials Select Sector Index. XLB is the smallest by asset and volume in the group, with 6.8 billion in assets and an average daily volume of 7.45 M.

EOM Main US Sectors NP

I charted the performance of each fund from the recent market bottom, March 2020, running to real-time. The results and returns by rank are as follows:

XLE-Energy Select Sector SPDR ETF (black line), up 114.08%, XLB-Materials Select Sector SPDR ETF (blue line), up 113.06%, XLI-Industrial Select Sector SPDR ETF (red line), up 109.06%, XLY-Consumer Discretionary Select Sector SPDR ETF (green line), up 106.10%.

XLK-Technology Select Sector SPDR ETF (pink line) up 104.21%. XLF-Financial Select Sector SPDR ETF (purple line) up 102.34%. XLV-Health Care Select Sector SPDR ETF (orange line) up 61.41%. XLU-Utilities Select Sector SPDR ETF (brown line) up 50.98%. The laggard in the group, XLP-Consumer Staples Select Sector SPDR ETF (gray line), is up 45.66%. The market, $SPX (green area), is up 85.11%.

Here are the key points:

  • Bigger is not always better. The larger funds did not consistently outperform the smaller funds.
  • These results represent a specific period. Different dates will result in different outcomes.
  • Past performance does not dictate future returns.
  • Six sector funds outperformed the returns of the S&P 500 ($SPX).
  • Three sector funds underperformed the returns of the S&P 500 ($SPX).
  • The leader of this group, XLE, outperformed $SPX by 28%.
  • The laggard of this group, XLP, underperformed $SPX by 39%.

This performance data is interesting, but the critical question-what are you planning to do with it? Here is what you should think about:

  • First, if you own sector funds, do you have their performance returns during this timeframe?
  • Second, if not, insert their symbols into a performance chart to see their returns.
  • Third, if you are not tracking your sector holdings' performance, then why?

If you have a managed account, you should already have this sector performance data. If not, request it. Then, ask for their sector game plan for when the next recession begins.

As we saw last week, the market continues to trade near all-time highs and currently is nowhere near a formal sell signal. No one knows when the next large-scale selling begins or what starts it. There is no better time than now to develop or fine-tune your capital preservation plan and be proactive for when it happens.

I will be watching when profit taking hits these top performers and money flows into the utilities and consumer staples. When this happens, I will be short the previous high-flyers and long the sectors moving up.

Plan your work, work your plan, and share your harvest!

David O. England is an investor/trader, financial analyst/educator/lecturer and Associate Professor Emeritus of Finance. This column is for educational purposes only and not intended as financial advice. Past performance does not dictate future returns. Questions? Send to thetraderseye@gmail.com.

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