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Summary

  • The Utilities ETF was the No. 1 performer ranked by returns among the nine Select Sector SPDRs during the first half of this year.
  • In contrast, the ETF was the No. 9 performer ranked by the same metric among the sector SPDRs over all of last year.
  • Meanwhile, seasonality analysis indicates the ETF just exited its strongest quarter of the year.

The Utilities exchange traded fund (NYSEARCA:XLU) in the first half of this year ranked No. 1 by return among the Select Sector SPDRs that partition the S&P 500 into nine pieces. On an adjusted share price basis, XLU rocketed to $44.26 from $37.34, a zoom of $6.92, or 18.53 percent.

By way of comparison, XLU, in all of last year, ranked No. 9 by total return among the Select Sector SPDRs as its adjusted share price advanced to $37.34 from $33.02, a gain of $4.32, or 13.08 percent. With Mr. Market more in risk-on mode and less in risk-off mode during 2013, XLU performed well, not on a relative basis but on an absolute basis.

Also by way of comparison, XLU, in the first half of this year, massively overperformed the SPDR S&P 500 ETF (NYSEARCA:SPY), whose adjusted share price climbed to $195.72 from $183.00, a hike of $12.72, or 6.95 percent. The relationship between SPY as an equity market proxy and XLU as a stock market indicator is a fascinating one. The sea change in the market this year was clearly telegraphed by the daily SPY:XLU ratio, as discussed in "Utilities No. 1 Among Select Sector SPDR ETFs In 2014 As Of Mid-April."

XLU appears key to any analysis of market sentiment based on the comparative behaviors of the Select Sector SPDRs. If XLU ranks close to No. 1 in returns during a given period, then I believe market participants are in risk-off mode; if XLU ranks close to No. 9 in returns over a given period, then I think market participants are in risk-on mode.

Figure 1: XLU No. 1 Among Select Sector SPDR ETFs This Year

(click to enlarge)

Source: This J.J.'s Risky Business chart is based on analyses of adjusted daily share price data at Yahoo Finance

The relative overperformance of low-beta sector SPDRs and the relative underperformance of high-beta sector SPDRs continues to seem important, with the large-capitalization segment of the market now in its historically weakest period of the year, as described in "SPY Seasonality: Share Price Cools Down While U.S. Air Temperature Heats Up" Of course, the U.S. Federal Reserve's move to tighter from looser monetary policies is happening in slow motion, which may blunt the effect of seasonality this year.

In the context of the Select Sector SPDRs, beta is a gauge of the volatility of each fund in comparison to the market as a whole. The lowest-beta sector SPDRs are Utilities, 0.23; Consumer Staples (NYSEARCA:XLP), 0.51; and Health Care (NYSEARCA:XLV), 0.76. The intermediate-beta sector SPDRs are Technology (NYSEARCA:XLK), 0.92; Consumer Discretionary (NYSEARCA:XLY), 1.00; and Industrial (NYSEARCA:XLI), 1.20. The highest-beta sector SPDRs are Financial (NYSEARCA:XLF), 1.40; and Materials (NYSEARCA:XLB), 1.40; and Energy (NYSEARCA:XLE), 1.50.

Figure 2: XLU Monthly Change, 2014 Versus 1999-2013 Mean

(click to enlarge)

Source: This J.J.'s Risky Business chart is based on analyses of adjusted monthly share price data at Yahoo Finance

XLU behaved better in the first half of this year than it performed in the first halves of its initial 15 full years of existence, according to the means calculated by employing data associated with that historical period (Figure 2). The same data set shows the second quarter to be the ETF's strongest quarter of the year, in terms of its share price.

Figure 3: XLU Monthly Change, 2014 Versus 1999-2013 Median

(click to enlarge)

Source: This J.J.'s Risky Business chart is based on analyses of adjusted monthly share price data at Yahoo Finance

XLU also behaved better in the first half of this year than it performed in the first halves of its initial 15 full years of existence, according to the medians calculated by using data associated with that historical period (Figure 3). The same data set also shows the second quarter to be the ETF's strongest quarter of the year, in terms of its share price.

On an absolute basis, XLU's share price may not advance as fast during the second half as it did over the first half, based on multiple factors, including earnings and seasonality. On a relative basis (i.e., in comparison with the other Select Sector SPDRs), however, XLU might continue to overperform, based on changes in the Fed's monetary policies.

Disclaimer: The opinions expressed herein by the author do not constitute an investment recommendation, and they are unsuitable for employment in the making of investment decisions. The opinions expressed herein address only certain aspects of potential investment in any securities and cannot substitute for comprehensive investment analysis. The opinions expressed herein are based on an incomplete set of information, illustrative in nature, and limited in scope. In addition, the opinions expressed herein reflect the author's best judgment as of the date of publication, and they are subject to change without notice.

Source: Utilities Select Sector SPDR ETF: XLU's 2014 Halftime Report And Seasonality