Sector ETF Analysis: Industrials Surge, Utilities Lag

by on March 2, 2010 | ETFs Mentioned:

Two months into 2010, hopes for a smooth, steady year for equity markets have already been dashed. After stumbling out of the gates as worries about the euro zone and the sustainability of China’s impressive growth, most equity markets bounced back in February, as rounds of solid economic data sparked renewed optimism in the U.S. recovery effort.

U.S. stock markets find themselves in a unique reactionary position, looking overseas for guidance in a remarkable reversal of historical trends. The strong correlations between global equity markets that emerged at the beginning of the recession have largely continued during the recovery, leading many investors to reevaluate the diversification benefits of spreading equity exposure across different regions, lamenting that geographic diversification let them down just when they needed it most.

While international stocks are seemingly moving in unison, a look under the hood of of domestic markets reveals some surprisingly large performance gaps between various sectors of the economy, suggesting that not all sectors have been moving in lock step. Below, we take a look at each of the nine sector SPDRs that in aggregate make up the S&P 500, analyzing the year-to-date performance and outlook for each.

Sector ETFs
Ticker Sector YTD
XLK Technology -3.9%
XLE Energy 0.5%
XLY Discretionary 4.2%
XLF Financials 3.4%
XLB Materials -1.9%
XLV Health Care 2.6%
XLU Utilities -4.4%
XLP Staples 3.2%
XLI Industrials 5.5%

Technology (XLK): -3.9% YTD

Tech stocks were the big story of the 2009 rally, but have struggled to find their footing so far this year. A disappointing earnings season, along with concerns that last year’s rally saw this sector get a bit ahead of its fundamentals, has set the tech sector back so far in 2010.

Energy (XLE): 0.5% YTD

The energy sector has taken investors on a wild ride so far in 2010, surging in the first two weeks of the year before stumbling more than 10% and bottoming out in early February. A recent run-up in crude oil prices has breathed life back into XLE, and with many experts calling for a prolonged period of rising oil prices, XLE once again has some wind at its back.

Consumer Discretionary (XLY): +4.2% YTD

Many investors view this sector as a leveraged play on the overall economy, since discretionary expenditures are often among the first items to be cut from corporate and consumer budgets during a downturn but can see outsized gains once the purse strings are loosened during a recovery. Despite mediocre confidence numbers in 2010, consumers are spending once again, and many companies in the discretionary sector reported strong earnings recently.

Financials (XLF): +3.4% YTD

The financials sector has remained very active this year, as the regulatory outlook continues to evolve for an industry that has been the subject of intense public scrutiny in recent years. After record bonuses at some Wall Street institutions threatened to spark another round of outrage, recent developments have indicated that financial reform may not be as detrimental to the industry as previously thought, giving this sector a boost so far in 2010.

Materials (XLB): -1.9% YTD

The materials sector has been one of the drags on the U.S. economy so far this year, as worries that policy decisions will negatively impact China’s appetite for raw materials has been the primary concern. With emerging markets now accounting for the majority of demand for products manufactured by this sector, investors are monitoring developments in China and Brazil more closely than ever.

Health Care (XLV): +2.6%YTD

Similar to financials, a constantly-evolving regulatory environment has made analysis of the health cares sector a challenging task. Health care reform is the signature agenda item of the Obama administration, but the movement met some resistance in recent months as sharp partisan divides have become evident. A recent wave of M&A activity has given this sector a bump in recent sessions.

Utilities (XLU): -4.4% YTD

The utilities sector, historically one of the most stable due to relatively low growth prospects and high dividend yields, has been the worst performing of the nine SPDRs in 2010. As risk appetite has returned to the market, current return (XLU has a dividend yield above 4%) has fallen out of favor, and utilities have slumped. As a low-beta equity option, any signs of turbulence could allow XLU to gain ground on other sectors.

Consumer Staples (XLP): +3.2% YTD

Consumer staples, which include food and beverage companies and household and personal product stocks, have been one of the stronger performers this year, rising along with more volatile discretionaries. Consumer staples were the top performing sector in 2008 when markets cratered, but have also taken part in the recovery effort, making this sector an attractive option for many investors.

Industrials (XLI): +5.5% YTD

Through two months, industrials have been the top-performing sector, as upticks in manufacturing activity and increased optimism over a sustainable recovery have boosted manufacturers, construction and engineering firms, and road and rail firms.

Disclosure: No positions at time of writing.