Health Care Select Sector SPDR ETF: XLV's 2014 Halftime Report And Seasonality

Jul. 3.14 | About: Health Care (XLV)

Summary

The Health Care ETF was the No. 3 performer ranked by returns among the nine Select Sector SPDRs during the first half of 2014.

In addition, the ETF overperformed the SPDR S&P 500 ETF, not only in the first half of this year but also over the past two years.

Obamacare, quantitative easing and sector rotation appear to have been the Health Care ETF's key drivers.

The Health Care exchange traded fund (NYSEARCA:XLV), in the first half of this year, ranked No. 3 by returns among the Select Sector SPDRs carving the S&P 500 into nine slices. On an adjusted daily share price basis, XLV ascended to $60.83 from $55.04, a climb of $5.79, or 10.52 percent.

Accordingly, XLV, in the first half, outperformed its parent proxy, the SPDR S&P 500 Trust ETF (NYSEARCA:SPY), which increased 6.95 percent, and underperformed its sibling proxies, the Utilities Select Sector SPDR (NYSEARCA:XLU) and the Energy Select Sector SPDR (NYSEARCA:XLE), which rose 18.53 percent and 14.18 percent, respectively.

Figure 1: SPY Vs. SPY, I Mean, XLV In The Age Of Obamacare

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

The healthcare sector in general and XLV in particular have progressed from a sweet spot to a sweeter spot to an even sweeter spot between June 2012 and June 2014, which also proved to be a pretty good period for the SPY (Figure 1). On an adjusted monthly share price basis, XLV skyrocketed to $60.83 from $36.72, a gain of $24.11, or 65.66 percent, while SPY soared to $195.72 from $130.56, a gain of $65.16, or 49.91 percent. XLV's share price appears to have been driven by the following key factors:

  • Obamacare. The Affordable Care Act's constitutionality was established in the landmark National Federation of Independent Business v. Sebelius decision handed down by the U.S. Supreme Court on June 28, 2012, as documented by the court.
  • Quantitative Easing. The Federal Open Market Committee announced the launch of the U.S. Federal Reserve's current QE program on Sept. 13 of the same year, as noted in "SPY, MDY And IJR At The Fed's QE3+ Market Top."
  • Sector Rotation. A boon for such rotation, the beginning of the end of the Fed's current QE program was announced by the FOMC last Dec. 18, as pointed out in "Building A Martin Zweig-Like Fed Indicator Integrating Innovations Of The 21st Century."

The QE factor may be consigned to the dustbin of history in October, but the other two factors might be key drivers of XLV more or less as much in the second half as they were in the first half of this year.

Figure 2: XLV No. 3 Among Select Sector SPDR ETFs This Year

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

In the foreseeable future, XLV may not behave absolutely well, but might perform relatively well.

Historically, XLV, XLU and the Consumer Staples ETF (NYSEARCA:XLP) have done better than have the other Select Sector SPDRs when the market has exited risk-on mode and entered risk-off mode, a long-term transition I believe is under way, as indicated in "Utilities No. 1 Among Select Sector SPDR ETFs In 2014 As Of Mid-April."

I think the fact XLU and XLV are already two of the top three Select Sector SPDRs as measured by returns this year is anything but a coincidence.

Figure 3: XLV Monthly Change, 2014 Vs. 1999-2013 Mean

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

XLV behaved better in the first half of this year than it performed in the first halves of its initial 15 full years of existence, based on the means calculated by employing data associated with that historical period (Figure 3). The same data set shows the average year's weakest quarter was the third, beginning on July 1.

Figure 4: XLV Monthly Change, 2014 Vs. 1999-2013 Median

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

XLV 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, based on the medians calculated by using data associated with that historical period (Figure 4). The same data set also shows the average year's weakest quarter was the third.

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