Beta Adjusted Sector ETF Performance Fall 2013

by: Gary Jakacky

In September of 2013 I published an article which compared the performance of the nine S&P500 sector ETFs with the S&P500 itself, to see which sector(s) were leading or lagging.

Many analysts assume if sector XYZ gained 15% while the S&P500 gained 13%, that sector "outperformed" the market. This is dangerously simplistic and incorrect. If XYZ is a very risky (high beta) portfolio you should expect it to perform better! Just because you can run a mile in 8 minutes doesn't mean Olympic sprinters should be judged by that standard, does it? Of course not. Similarly, sector performance should be compared to what we expected, given the overall risk of that portfolio or ETF. We will measure risk by Beta, which can be obtained in many places on the internet. We used the betas provided by Yahoo Finance.

I have decided to use the period from October 9th, 2013 to the present, as our period of comparison. Why October 9th? That is the time when Congress began to work out a budget deal, and also when it became clear the Fed was serious about tapering in the near future. Basically, it is when the current stage of this four (soon to be five) year bull market began its big move.

The details of the calculations for the chart below are in my previous article. For our purposes, column two is the actual return on each of the nine SPDR Sector ETFs; column three is the expected return; and column four is the difference, over (+) or under (-) performance. We use the SPDR S&P500 ETF (NYSEARCA:SPY) as the standard of comparison.

The last time I ran this scan most sectors performed pretty much as expected. Health Care (NYSEARCA:XLV) and Consumer Discretionary (NYSEARCA:XLY) were standout performers; Finance (NYSEARCA:XLF) was a noticeable laggard. All the others were within 1% of expected performance.

This time it is quite different. Investors have become more selective in their buys and sells.

Sector ETF Performance in Late 2013

ETF Actual Performance Expected Performance Difference
XLY 12.5% 10.0% +2.5%
XLP 7.0% 5.0% +2%
XLE 7.0% 11.6% -4.6%
XLF 11.5% 13.0% -2.5%
XLV 11.5% 6.4% +5.1%
XLI 14.0% 11.0% +3.0%
XLB 9.5% 12.5% -3.0%
XLK 12.0% 9.9% +2.1%
XLU 1.0% 4.8% -3.8%
SPY 11.0% the same, by definition zero

Health Care and Consumer Discretionary have been joined by Industrials (NYSEARCA:XLI), Staples (NYSEARCA:XLP) and Technology (NYSEARCA:XLK) as outperformers. Noticeable laggards are Energy (NYSEARCA:XLE), Basic Materials (NYSEARCA:XLB) and Utilities (NYSEARCA:XLU). The latter has had a big shift. Last summer utility stocks were hanging in there, even as the economy strengthened and interest rates rose. Now they are laggards. Joining them are Finance which were underperformers last summer as well.

What can we glean from all this? As I have made clear in other articles, Health Care stocks are not stodgy conservative investments any more: they are an industry with rapid growth and technological innovation the likes of which will only accelerate in future years. Thus the four outperforming sectors are suggesting the economy is on a solid footing and will continue to roar ahead.

Many economists believe a large part of this strength is due to cheaper energy from horizontal drilling and fracking. It should not surprise us, therefore, that is the poorest performer. Utility shares have finally succumbed to higher interest rates (though they are still performing better than Treasury Bonds... more about this in future articles.) Finance and Banking stocks continue to be crushed by regulations and lawsuits.

All this should tell investors that the economy is on a solid footing, with the parade being led by innovators in the medical and technology sectors. Readers sniffing around for bargains might look at some energy shares: it is hard to believe economic growth will not eventually lead to firming oil and gas prices.

Disclosure: I am long SPY, IHI, XLV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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