Seeking Alpha
Long/short equity, healthcare, oil & gas, tech
Profile| Send Message|
( followers)  

Summary

  • The Materials ETF was the No. 4 performer ranked by returns among the nine Select Sector SPDRs during the first half of 2014.
  • Meanwhile, the ETF also overperformed the SPDR S&P 500 ETF by 1.39 percentage points over the same period.
  • Still, the Materials ETF is a good candidate to underperform its parent proxy in the second half of this year.

The Materials exchange traded fund (NYSEARCA:XLB) in the first half of this year ranked No. 4 by returns among the Select Sector SPDRs that chop the S&P 500 into nine morsels. On an adjusted daily share price basis, XLB advanced to $49.64 from $45.82, a gain of $3.82, or 8.34 percent. (It closed at $50.14 Thursday.)

XLB in the first half thus outperformed its parent proxy, the SPDR S&P 500 ETF (NYSEARCA:SPY), which climbed 6.95 percent, but underperformed its siblings Utilities ETF (NYSEARCA:XLU), Energy ETF (NYSEARCA:XLE) and Health Care ETF (NYSEARCA:XLV), which grew 18.53 percent, 14.18 percent and 10.52 percent, respectively.

Figure 1: Materials ETF Industry Allocation As Of July 3

(click to enlarge)

Source: This J.J.'s Risky Business chart is based on data at the State Street Global Advisors site, which was up-to-date as of July 3.

Chemical industry giants dominate XLB (Figure 1). Its three largest holdings and their weightings are the Monsanto Co. (NYSE:MON), 10.72 percent; the Dow Chemical Co. (NYSE:DOW), 10.13 percent; and E.I. du Pont de Nemours and Co. (NYSE:DD), 9.76 percent. They and the other 27 materials sector firms held by the ETF are all comparatively cyclical.

This cyclicality could be problematic for XLB in 2014: It may have outperformed SPY in the first half, but it might underperform the same fund in the second half.

Around the world, the International Monetary Fund appears to believe economic momentum has slackened since the publication of its latest World Economic Outlook report in April, as I noted at the International Business Times. IMF Managing Director Christine Lagarde remarked in a speech in France Sunday, "We are seeing global activity pick up, but the momentum could be less robust than expected because potential growth is weaker [and] investment remains lackluster."

Across the country, the anticipated big bounce in economic activity from the first quarter to the second quarter seems to have come and gone, as I pointed out on Seeking Alpha. Based largely on data generated by the Institute for Supply Management, my U.S. Economic Index dipped in June for the first time in four months, to 55.91 from 56.19. This decline of -0.27 point, or -0.49 percent, is diminutive, but enough for me to think the economic recovery associated with the extreme weather last winter is now complete.

Figure 2: XLB No. 4 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.

It is difficult to imagine the most cyclical equity-market sectors described by Alessandro Beber, Michael W. Brandt and Kenneth A. Kavajecz in their National Bureau of Economic Research working paper What Does Equity Sector Orderflow Tell Us About the Economy? continuing to behave well on either absolute or relative bases at this point in the economic/market cycle, especially given the previously discussed circumstances around the world and across the country.

As a result, XLB, the Technology SPDR (NYSEARCA:XLK) and the Industrial SPDR (NYSEARCA:XLI) all appear to be good candidates to underperform SPY in the second half of this year.

Figure 3: XLB Monthly Change, 2014 Vs. 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.

XLB 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, with a negative return.

Figure 4: XLB Monthly Change, 2014 Vs. 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.

XLB 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, with a negative return.

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.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Materials Select Sector SPDR ETF: XLB's 2014 Halftime Report And Seasonality