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Summary

  • The Financial ETF was the No. 7 performer ranked by returns among the nine Select Sector SPDRs during the first half of 2014.
  • The ETF underperformed its parent proxy SPDR S&P 500 Trust ETF by 2.11 percentage points over the same period.
  • U.S. Federal Reserve policy changes may serve as headwinds for the ETF in the foreseeable future.

The Financial exchange traded fund (NYSEARCA:XLF), in the first half of this year, ranked No. 7 by returns among the Select Sector SPDRs that cleave the S&P 500 into nine fragments. On an adjusted daily share price basis, XLF progressed to $22.74 from $21.69, a yield of $1.05, or 4.84 percent. (It closed at $22.80 Wednesday.)

As a result, XLF, in the first half, underperformed its parent proxy, the SPDR S&P 500 Trust ETF (NYSEARCA:SPY), which grew 6.95 percent, and outperformed only its siblings the Industrial ETF (NYSEARCA:XLI) and the Consumer Discretionary ETF (NYSEARCA:XLY), which rose 4.36 percent and 0.50 percent, respectively.

Figure 1: SPY, XLF Monthly Share Prices, December 1998-June 2014

(click to enlarge)

Note: The SPY share price scale is on the left (green) and the XLF share price scale is on the right (red).

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

Three massive equity market bubbles are associated with the 21st century. The technology sector was ground zero when the first one burst, and the financial sector was ground zero when the second one burst (Figure 1).

In the former case, the Technology Select Sector SPDR ETF (NYSEARCA:XLK) had double-digit percentage losses in each of three consecutive years (2000-2002). In the latter case, XLF had double-digit percentage losses in each of two straight years (2007-2008).

XLF's breathtaking plunge of -54.93 percent on an adjusted daily share price basis in 2008 stands alone, and by a wide margin, as the worst annual performance by any of the Select Sector SPDR ETFs since their launch in December 1998.

Figure 2: XLF No. 7 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.

XLF most likely will not be the worst performer among the Select Sector SPDR ETFs when the current massive stock market bubble bursts, but it most likely will not be the best performer among them at that time, either. And it appears probable its return will lag SPY's, as it did in the first half of this year (Figure 2).

On absolute and relative bases, XLF's behavior should be greatly influenced by the U.S. Federal Reserve's actions before and after the ending of its present quantitative easing program (presumably around October) and the beginning of its interest rate hikes (presumably around April).

Effects of the Fed's moves away from looser and toward tighter monetary policies may become increasingly apparent in the financial statements of a number of XLF's component companies during the next few quarters, especially in association with metrics such as their bad-debt reserves, net interest margins and returns on assets.

QE4, anyone?

Figure 3: XLF 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.

XLF 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, and its strongest quarter was the fourth, with a positive return.

Figure 4: XLF 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.

XLF 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 shows the average year's weakest quarter was the first, with a comparatively small positive return, and its strongest quarter was the fourth, with a comparatively large positive 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.

Source: Financial Select Sector SPDR ETF: XLF's 2014 Halftime Report And Seasonality