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Summary

  • The Industrial ETF was the No. 8 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 2.59 percentage points over the same period.
  • U.S. and global economic growth may serve as a headwind for the ETF in the foreseeable future.

The Industrial exchange traded fund (NYSEARCA:XLI), in the first half of this year, ranked No. 8 by returns among the Select Sector SPDRs that divide the S&P 500 into nine portions. On an adjusted daily share price basis, XLI moved up to $54.06 from $51.80, a gain of $2.26, or 4.36 percent. (It closed at $53.76 Thursday.)

XLI, in the first half, thus underperformed its parent proxy, the SPDR S&P 500 Trust ETF (NYSEARCA:SPY), which climbed 6.95 percent, and outperformed only one of its siblings, the Consumer Discretionary ETF (NYSEARCA:XLY), which edged higher 0.50 percent.

Figure 1: U.S. Federal Reserve Estimates Of Changes In Real GDP

(click to enlarge)

Source: U.S. Federal Reserve

XLI, the Materials SPDR ETF (NYSEARCA:XLB) and the Technology SPDR ETF (NYSEARCA:XLK) represent the most cyclical sectors of the equity market, according to 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?

As a result, it appears none of these three ETFs is positioned to behave well on either absolute or relative bases at this point in the economic/market cycle, which has been delineated by the following developments during the past month:

  • The International Monetary Fund basically cut its estimate of 2014 growth in U.S. real gross domestic product to 2.00 percent on June 16 from 2.75 percent on April 8.
  • The Federal Reserve effectively cut its forecast of 2014 growth in U.S. real GDP to a range between 2.10 percent and 2.30 percent on June 18 from a range between 2.80 percent and 3.00 percent on March 19 (Figure 1).
  • The IMF may soon similarly cut its projection of 2014 growth in global real GDP, as I indicated in an International Business Times article about IMF Managing Director Christine Lagarde's remarks in a speech in France last Sunday.

Figure 2: XLI No. 8 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.

XLI may be among the Select Sector SPDR ETFs most adversely affected by the Fed's end of its current quantitative easing program (presumably around October) and its beginning of interest rate hikes (presumably around April). Of course, a delay in either policy change could redound to the short-term benefit of the ETF's component companies.

Figure 3: XLI 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.

XLI 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: XLI 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.

XLI 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 third, 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.

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: Industrial Select Sector SPDR ETF: XLI's 2014 Halftime Report And Seasonality