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David England: Find clues in sector rotation
Column | Eye on the Market

David England: Find clues in sector rotation

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Last week, I introduced you to the nine main sectors and audited their performance ($SPX) since the March 2020 bottom.

Why? To identify sectors that are outperforming and underperforming the market for future portfolio considerations.

Let us review. Tech 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, 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.

Many are asking, is the market topping? While it is too early to confirm or deny, let us see if the current sector rotation can give us some much-needed clues.

EOM Sector Perf. 4-24-21

To see the performance of these main U.S. sector ETFs relative to the performance of the market ($SPX), I designed a chart beginning on March 24, 2021, running to real-time. I included a separate window to the right showing the previous two weeks' action.

Here are the key points:

1. Since March of 2021, the three laggings sectors picking up momentum (blue box) are Consumer Staples, Health Care, and Utilities. 

2. In the last week, the top-performing sectors experienced profit-taking (red box).

3. Keep an eye on this to see if it reverses or maybe the beginning of a correction.

In this part of my series, I answer your questions and introduce you to my favorite funds in each sector. Today, I begin with the sector that in the last year was the laggard, Consumer Staples.

What exactly are consumer staples? They are products such as foods and beverages, household goods, and hygiene products, but the category also includes alcohol and tobacco. Staple goods are products that consumers will not or are unwilling to cut out of their budgets, regardless of their financial situation.

My favorite consumer staple funds ranked by size as follows: 

XLP-Consumer Staples Select Sector SPDR ETF tracks companies in the Consumer Staples Select Sector Index. XLP is the largest fund in this group, with assets of 10.19 B and an average trading volume of 13.1 M.

VDC-Vanguard Consumer Staples Index Fund ETF tracks the performance of the MSCI US Investable Market Index/Consumer Staples index, made up of stocks of large, mid-size, and small U.S. companies. XLP has assets of 6.26 B and an average trading volume of 139 K.

FSTA-Fidelity MSCI Consumer Staples Index ETF tracks companies in the MSCI USA IMI Consumer Staples 25/50 Index, representing the consumer staples sector in the U.S. equity market. FSTA has assets of 787 M and an average trading volume of 153 K.

IYK-iShares U.S. Consumer Goods ETF tracks the investment results of the Dow Jones U.S. Consumer Goods Index. IYK has assets of 732 M and an average trading volume of 42 K.

RHS-Invesco S&P 500 Equal Weight Consumer Staples ETF tracks companies in the S&P 500 Equal Weight Consumer Staples Index. RHS has assets of 454 M and an average daily trading volume of 16 K. Caution-very low volume.

FXG-First Trust Consumer Staples Alpha DEX ETF tracks companies in the Strata Quant Consumer Staples Index; a modified equal dollar weighted index designed to objectively identify and select consumer staple stocks from the Russell 1000. FXG has assets of 249M, the lowest in the group, and an average daily trading volume of 31K.

EOM C Staples Funds

I charted the performance of each fund beginning Jan. 1, 2021, running to real-time. The results and returns by rank are as follows:

FXG-First Trust Consumer Staples Alpha DEX ETF (blue line), up 14.98%, RHS-Invesco S&P 500 Equal Weight Consumer Staples ETF (red line), up 8.21%, VDC-Vanguard Consumer Staples Index Fund ETF (green line), up 6.01%, FSTA-Fidelity MSCI Consumer Staples Index ETF (pink line) up 5.92%. IYK-iShares U.S. Consumer Goods ETF (purple line) up 5.69%. XLV-Health Care Select Sector SPDR ETF (black line) up 4.75%. The market, $SPX (green area), is up 10.76%.

Here are the key points:

1. Bigger is not always better. All smaller funds outperformed the largest fund XLP.

2. The smallest fund in the group, FXG, was the only fund to outperform the market ($SPX).

3. Five funds underperformed the returns of the market ($SPX).

4. The laggard of this group, XLP, underperformed $SPX by 6.01%.

5. These results represent a specific period. Different dates will result in different outcomes.

6. Past performance does not dictate future returns.

Here is what you should think about:

First, if you own sector funds, how are they performing compared to these funds?

Second, if you are not tracking your sector funds performance, then why?

As we saw last week, the market traded near all-time highs. No one knows when the next large-scale selling begins but is this short-term sector rotation signaling a top is in?

I will be watching to see if profit-taking continues in the top-performing sectors and money flows more into the utilities and consumer staples. When this happens, the institutions will be short the previous high-flyers and long the sectors moving up. 

What’s next? My favorite utility funds.

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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