The Industrial Select Sector SPDR ETF (NYSEARCA:XLI) in Q1 ranked No. 6 by return among the Select Sector SPDRs that divide the S&P 500 into nine portions, as XLI's adjusted closing daily share price contracted to $55.77 from $56.32, a decrease of -55 cents, or -0.98 percent. Accordingly, it lagged its period-leading sibling Health Care Select Sector SPDR ETF (XLV) by -7.30 percentage points and its parent proxy SPDR S&P 500 Trust ETF (SPY) by -1.86 points. (XLI closed at $56.43 Monday).
XLI ranked No. 7 among the sector SPDRs in March, as it trailed XLV by -3.19 percentage points and SPY by -0.98 points.
Comparisons of changes by percentages in all nine sector SPDRs and SPY during Q1 and in March can be found in charts here.
Figure 1: XLI Monthly Change, 2015 Vs. 1999-2014 Mean
Source: This J.J.'s Risky Business chart is based on analyses of adjusted closing monthly share prices at Yahoo Finance.
XLI behaved worse in Q1 than it did during the comparable periods in its initial 16 full years of existence based on the monthly means calculated by employing data associated with that historical time frame (Figure 1). The same data set shows the average year's weakest quarter was the third, with a relatively small negative return, and its strongest quarter was the fourth, with an absolutely large positive return. The underlying data show the ETF in April previously had positive returns 11 times and negative returns five times.
Figure 2: XLI Monthly Change, 2015 Vs. 1999-2014 Median
Source: This J.J.'s Risky Business chart is based on analyses of adjusted closing monthly share prices at Yahoo Finance.
XLI performed a lot worse in Q1 than it did during the comparable periods in its initial 16 full years of existence based on the monthly medians calculated by using data associated with that historical time frame (Figure 2). The same data set shows the average year's weakest quarter was the third, with a relatively small positive return, and its strongest quarter was the fourth, with an absolutely large positive return. The underlying data show the ETF has had negative returns in April in two of the past three years.
Figure 3: XLI's Top 10 Holdings and P/E-G Ratios, April 10
Note: The XLI holding-weight-by-percentage scale is on the left (green), and the company price/earnings-to-growth ratio scale is on the right (red).
Source: This J.J.'s Risky Business chart is based on data at the XLI microsite and FinViz.com (both current as of April 13).
Because General Electric Co. (GE) is XLI's top holding (Figure 3), the corporate restructuring announced Friday should have effects on the ETF's characteristics over time, as it stops being dominated by a systemically important financial institution, as designated by the U.S. Financial Stability Oversight Council, and starts being dominated by a large industrial behemoth as GE has been most of its 123-year history. "Under the plan," the firm said in a statement:
"GE expects that by 2018 more than 90 percent of its earnings will be generated by its high-return industrial businesses, up from 58 percent in 2014."
This change, notwithstanding, I believe it is still helpful to monitor XLI's valuation via the numbers reported by S&P Senior Index Analyst Howard Silverblatt indicating the P/E-G ratio of the S&P 500 industrial sector underlying the ETF inched up to 1.39 April 2 from 1.37 Dec. 31, an increase of 0.02, or 1.46 percent.
Any increase in the U.S. industrial sector's valuation appears unwarranted at this time, given the bias divergence at big central banks around the world that has led to a strengthening U.S. dollar on the one hand and a weakening euro, Japanese yen, British pound sterling, Canadian dollar, Swedish krona and Swiss franc on the other hand.
This currency-exchange issue merited extensive mention by International Monetary Fund Economic Counselor Olivier Blanchard in the IMF's April 2015 World Economic Outlook, which was discussed at a press conference in Washington Tuesday. According to Blanchard:
"Exchange-rate movements have been unusually large. Among major currencies, the dollar has seen a major appreciation and the euro and the yen a major depreciation. These movements clearly reflect major differences in monetary policy, with the United States expecting to exit the zero lower bound this year, but with no such prospects for the euro area or Japan. Given that these differences have been clear for some time, the surprise here may be how long it took for these exchange-rate movements to occur. To the extent that both the euro area and Japan were at risk of another relapse, the euro and yen depreciations will help. To some extent, the United States has the policy room to offset the adverse effects of the dollar appreciation. Thus, this adjustment of exchange rates must be seen, on net, as good news for the world economy."
Good news for the world economy? Maybe. Good news for the industrial companies in the euro area or Japan? Perhaps. Good news for the industrial firms in XLI? Nope.
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.
