How Different Sector ETFs Are Reacting To Fiscal Cliff Fears

by: Gary Gordon

Many of us in the financial services industry expected the outcome of the election to be determined by Ohio alone. Perhaps surprisingly, while Ohio was close throughout the evening, there was never a need for recounting the “Buckeye State” ballots -- President Obama had won the electoral votes needed without a single-state showdown.

While a protracted battle for control of the White House could have unhinged market participants, the possibility quickly gave way to the more pressing “fiscal cliff.” The cessation of scores of tax breaks combined with automatic spending cuts can be credited with enormous selling pressure across the risk spectrum on 11/7/2012.

Unlike election uncertainty, however, market-watchers have been warning about the ramifications of a prolonged fiscal debate for months. In my 10/17 commentary, I identified 3 broad ETF categories that are less troubled by the partisan divide on tax extensions and budgetary belt-tightening.

Here on 11/7, though, investors have been running for the hills. Other than risk-off bond choices, there’s very little in the positive column.

That said, it may be instructive to view how the different economic segments are faring. Indeed, not every stock ETF is down as much as the broader S&P 500 SPDR Trust (NYSEARCA:SPY).

Economic Sector ETFs Respond Differently To Fiscal Cliff Concerns
11/7 Approx %
Vanguard Real Estate Investment Trust REIT (NYSEARCA:VNQ) -0.5%
SPDR Select Consumer Staples (NYSEARCA:XLP) -1.2%
SPDR Select Consumer Discretionary (NYSEARCA:XLY) -1.2%
SPDR Select Materials (NYSEARCA:XLB) -1.5%
SPDR Select Health Care (NYSEARCA:XLV) -1.7%
SPDR Select Utilities (NYSEARCA:XLU) -2.2%
S&P 500 SPDR Trust (SPY) -2.3%
Vanguard Telecom (NYSEARCA:VOX) -2.4%
SPDR Select Technology (NYSEARCA:XLK) -2.4%
SPDR Select Industrials (NYSEARCA:XLI) -2.5%
SPDR Select Biotech (NYSEARCA:XBI) -2.5%
SPDR Select Energy (NYSEARCA:XLE) -2.8%
SPDR Select Financials (NYSEARCA:XLF) -3.5%

As one might anticipate, most of the economically sensitive sectors have been getting hit the hardest. Energy (XLE), Industrials (XLI), Financials (XLF) and Technology (XLK) have taken the brunt of the risk-off activity.

There are several areas that may represent pockets of opportunity. For example, few areas of the market have been ravaged more by weak domestic and weak global demand than Materials (XLB). Why, then, should this sector behave a bit like a non-cyclical segment?

There are two possibilities. First, more and more folks believe in the probability of a resilient China. The more Chinese demand for “stuff,” the better XLB performs. Indeed, the series of “higher lows” in September, October and November for the XLB:SPY price ratio is a sign of relative strength in the materials arena.

(click images to enlarge)

There’s another possibility, albeit a stealth one at that. President Obama’s victory assures a continuation of the ultra-easy monetary policy of the Federal Reserve. (Note: Romney had talked about his opposition to Bernanke’s electronic money printing.) It follows that there are a number of gold/metals miners in the S&P Basic Materials Index like Newmont Mining (NYSE:NEM). Some of them were essentially flat on the trading session, as gold figures to benefit from Obama’s second term.

Last, but not least, Consumer Discretionary (XLY) showed signs of relative strength in the dramatic sell-off as well. It may speak to the electorate’s increasing consumption and increasing sentiment. It may also be ignoring revenue misses and poor earnings guidance going forward, but that’s for another discussion.

Market Vectors Retail (NYSEARCA:RTH) may offer a less volatile way to invest in the consumer sector. It is weighted equally between consumer defensive and cyclical consumer stationary, and has a lower beta than XLY. And yet, RTH has outperformed XLY year-to-date.

Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.