VFH And IYF Are The Best Sector ETFs In Current Market

Includes: IYF, VFH
by: Lowell Herr

Whether one selects a sector from iShares or the Vanguard group of ETFs, the financial sector stands out as the one with the greatest probability of doing well over the next six to twelve months. By similar analysis, one would do well to avoid the healthcare and consumer goods sectors.

In the following table, sector ETFs were selected from both Vanguard and iShares. Regardless which you choose to use, the projections are similar based on the sector under analysis. For purposes of this discussion, five-years of data were selected and the projected annual return for the S&P 500 was set at 7.0%. This future S&P 500 growth projection has a direct impact on the Future column for the individual sector ETFs.

"Delta Factor" is a calculation based on historical growth (or loss), projected future growth (or loss), and how well the individual ETF is expected to perform with respect to a benchmark such as the S&P 500 or similar equity index. The argument is one of reversion-to-the-mean. If the ETF performed poorly in the past, the probability of reversing direction and returning to a more "normal" performance is highly probable. If the sector ETF recently had a great run, expect a pull-back or a reversion-to-the-mean.

Based on this logic, the financial sector is most likely to do well over the next six to twelve months while healthcare and consumer goods are projected to lag the broad market.

Disclaimer: Anytime one is projecting future performance, the caution flag needs to be raised. These are probability, not absolute arguments. In addition, I've observed that both positive (green) and negative (red) projections tend to show up one or more months before the trend is realized. For several months, the positive signal for the financial sector has been in place and recent price movement supports this signal.

Disclosure: I am long VFH.