Sector ETF Highlights and Lowlights from Market Bottom

by on March 4, 2014 | ETFs Mentioned:

Since the depths of the financial crisis over five years ago, one of the most debated topics remains the efficacy of the Federal Reserve’s unprecedented stimulus program. Only hindsight will reveal whether or not the era of “free money” was a success or a great blunder, but whatever the case may be years from now, the fact of the matter is that the Fed’s intervention did spark one of the strongest bull markets in history, following a widespread financial meltdown [see The Fed Effect: How Monetary Policy Impacts Your ETFs].

Sector ETF Performance Review: 5 Years After the Bottom

Prior to the start of 2009, the Federal Reserve cut interest rates to historically unprecedented levels (0-0.25%) in mid-December of 2008; however, the U.S. stock market proceeded to sink lower as the looming clouds of uncertainty didn’t start to scatter until the Fed announced it would expand its quantitative easing initiative, “QE” for short, on March 18h, 2009. Looking back, the coveted S&P 500 Index, as represented by State Street’s (SPY, A), bottomed out on 3/6/ 2009 and it has since generated a stellar cumulative return of  152% through 2/28/2014 [see Do Volume Spikes Signal Trend Reversal in the SPDR S&P 500 ETF ?]

Below we take a deeper dive into SPY’s impressive run and take a look at how the various sectors, as represented by State Street’s SPDR lineup, have each held up along the way for the last five years; please note the returns below are monthly, adjusted for dividends, and span from 3/1/2009 to 3/1/2014.

Some of the key takeaways from this performance review are:

  1. Financials (XLF, A) definitively led the way higher after the official bottom; this makes sense seeing as how these securities were the culprits behind the 2008 housing bubble and as a result were the most severely beat down ones out there, presenting brave buyers with a stellar buying opportunity.
  2. Utilities (XLU, A) have been the laggard in the pack from the beginning; this makes sense from a risk appetite perspective, seeing as how investors have preferred the more cyclical sectors in lieu of settling for safer, dividend-paying utility companies from the start of this bull market.
  3. Technology (XLK, A) has been a surprising laggard; this is a bit unexpected seeing as how the tech sector’s performance is generally associated as being closely tied to investors’ risk appetite, which has been on the rise since the bottom.
  4. Basic Materials (XLB, A) and Energy (XLE, A) have been laggards as well; this makes more sense than the tech sector lagging, seeing as how basic materials and energy companies are more sensitive to global economic growth, which has remained gloomy at best thanks to a sluggish recovery in the eurozone and persistent fears over China’s “hard landing”.
  5. Consumer Discretionary (XLY, A) battled with Industrials (XLI, A) until definitively taking the lead in late 2011; since then, XLY has been the absolute best performer from the pack, and it has outperformed its defensive-counterpart, the Consumer Staples (XLP, A), by a margin of more than 130% as of 3/1/2014.

The Bottom Line

There will always be a clash of ideologies on Wall Street – this time around the debate has centered around the efficacy and potential consequences regarding the Fed’s unprecedented stimulus efforts. No matter which side of the debate you might fall on, what’s undeniable is the very bullish price action seen since the market bottom in 2009 through today. While cyclical, growth-sensitive sectors have been leading the way higher thus far, investors shouldn’t rule out the defensive ones. Remember that every bull market has its ups and downs, and thus, it might be prudent to allocate some capital to defensive securities when they are quietly drifting rather than waiting for volatility spike, in which case it might be too late to protect yourself.

Follow me on Twitter @SBojinov

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Disclosure: No positions at time of writing.