Some Sector ETFs Break Out To New Highs, Others Hesitate

by: Gary Gordon

My clients have benefited from a healthy slice of exposure to risk in 2012. Top ETF holdings include assets like SPDR S&P China (NYSEARCA:GXC), Vanguard Dividend Growth (NYSEARCA:VIG), iShares High Yield Corporate (NYSEARCA:HYG) and Vanguard Growth (NYSEARCA:VUG).

My income-oriented winners like JPMorgan Alerian MLP (NYSEARCA:AMJ) and PowerShares CEF Income (NYSEARCA:PCEF) have been noticeably slower on the capital appreciation lately. And while that was never the purpose, “20/20 hindsight” indicates that I may even be underweight traditional equities.

That said, with transportation stocks, materials and small caps lagging the Apple-happy, large-cap benchmarks, I had been expecting a corrective period. However, it simply hasn’t come to fruition. In fact, each of the large-cap bellwethers have all eclipsed multi-year highs.

Fortunately, I don’t sell riskier assets simply because I believe a pullback is probable. Rather, I sell some riskier assets when stop-limit loss orders execute. Similarly, I may purchase insurance via iPath S&P 500 Mid-Term VIX Volatility (NYSEARCA:VXZ).

The question that intrigues me right now is whether or not the multi-year highs are widespread across the economic sector landscape, or are those highs confined to the S&P 500, Nasdaq and Dow Industrials. It follows that I checked the nine most prominent segments and the popular ETFs representing each:

Sector ETFs: Percentage Below A Multi-Year High
Approx %
Health Care Select Sector SPDR (NYSEARCA:XLV) 0.0%
Utilities Select Sector SPDR (NYSEARCA:XLU) -2.8%
Consumer Staples Select SPDR (NYSEARCA:XLP) -0.3%
Consumer Discretion Select SPDR (NYSEARCA:XLY) -0.1%
Industrials Select Sector SPDR (NYSEARCA:XLI) -0.2%
Technology Select Sector SPDR (NYSEARCA:XLK) 0.0%
Materials Select Sector SPDR (NYSEARCA:XLB) -7.8%
Energy Select Sector SPDR (NYSEARCA:XLE) -6.1%
Financials Select Sector SPDR (NYSEARCA:XLF) -7.5%
S&P 500 SPDR Trust (NYSEARCA:SPY) -0.1%

In reviewing the specific sectors, one may wish to remove SPDR Select Financials (XLF) from the assessment. After all, it has effectively reached a 52-week high and has nearly accumulated 19% in 2012 alone. And that leaves six out of eight sectors within spitting range of multi-year peaks. In essence, the S&P 500 isn’t being goosed by Apple shares alone.

The one area of weakness lies within natural resources-related industries - energy and materials. Perhaps ironically, commodity price inflation in oil and a variety of metals hasn’t helped the shares of the miners and explorers as much as one might expect.

Equally disconcerting for believers in the emerging market growth story, resources-intensive Vanguard Emerging Markets (NYSEARCA:VWO) is still struggling to keep pace with the SPDR S&P 500 Trust (SPY). This is easily seen in the VWO:SPY price ratio, where it has languished below a 200-day trendline for the better part of an entire year.

Click to enlarge

VWO SPY price ratio

In sum, the evidence for investing in resources-rich emergers, or even the materials and energy sectors stateside, is lacking. If you wish to curb your energy stock exposure abroad, you might explore the possibility of tech-heavy Taiwan (NYSEARCA:EWT) or EG Shares Low Volatility Emerging Markets (NYSEARCA:HILO). The latter is chock-full of staples, healthcare and utilities.

Similarly, energy pipeline partnerships still offer a less volatile, and potentially more rewarding, investment in the transportation and storage of oil/gas. Alerian MLP ETF (NYSEARCA:AMLP) as well as JPMorgan Alerian MLP ETN (AMJ) are two solid contenders.

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.