Sector & Region Outlook: March 2011

Published on by on March 1, 2011

Ticker Sector Forward P/E Div. Yield
XLF Financial 12.56 .93%
XLB Materials 13.5 3.02%
XLV Health Care 11.44 1.79%
XLU Utilities 12.72 4%
XLP Consumer Staples 14.31 2.58%
XLI Industrial 15.49 1.59%
XLE Energy 14.5 1.28%
XLY Consumer Discretionary 15.6 1.26%
XLK Technology 14.07 1.22%
*Source: as of 2/28/11

For investors looking to identify sectors of the U.S. economy that may be poised for relative outperformance, we present the ETF Database sector grid, highlighting the forward-looking price-to-earnings ratios of each of the nine sector SPDRs.

Last month nearly all of the sector multiples declined modestly as domestic equities took a small hit. The brief correction was much overdue given the consistently overbought range that the market as a whole has been trading in. Materials saw a drop in their forward multiple, as the sector was quick to give up much of the gains accumulated during February. Surprisingly enough, the Energy sector saw much less volatility than expected considering the political unrest developing in the Middle East.

Utilities continue to be an attractive investment from a dividend yield perspective, and it was the only sector that saw its multiple slightly increase. Equities in this sector appreciated nicely as investors fled to safety amidst the general economic uncertainty still plaguing global financial markets. Given the inflow of funds into the sector, its dividend yield dropped from 4.4% to 4.02%.

Forward multiple changes across the remaining sectors was relatively insignificant, and dividend yields remained unchanged for the most part.

Region Outlook

ETF Region Forward P/E
SPY U.S. 13.66
FEZ Europe 10.29
DGT Global Developed 11.28
CWI Global ex-U.S. 12.52
GMM Emerging Markets 11.97
*Source: as of 2/28/11

Pricing multiples in the region outlook grid broadly declined in February. The biggest loser was Europe, as the region digested mixed economic data including a weaker than expected GDP number from the United Kingdom. Japanese markets were also weak given the disappointing trade data earlier in the week, and developed and emerging equities slid lower as a whole.

Emerging markets are still undervalued relative to domestic equities when considering their forward looking P/E multiples. It’s important to consider that this is not a screaming buy signal, instead it ought to be considered as a sign that investors are still not yet willing to pay a premium for emerging market exposure.

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