By Justin Carbonneau (Twitter | LinkedIn | YouTube) —
There are eleven sectors (Energy, Health Care, Consumer Staples, Technology, Consumer Discretionary, Industrials, Communication, Services, Financials, Real Estate, Utilities, and Materials) that make up the S&P 500. With over $230 billion in total assets, the SPDR Select Sector ETFs are considered the go-to funds for investors looking to make sector bets or investment allocations. These ETFs hold the stocks from the S&P 500 within a specific sector. For example, the Energy Select Sector SPDR Fund holds energy-related stocks in the S&P 500.
SPDR Select Sector Performance – You Could Drive a Mack Truck Through It
This year is unfolding much like most years, characterized by a significant amount of variation at the sector level. For example, the SPDR Communication Services Select Sector ETF (XLC) has seen an impressive gain of nearly 40%, whereas the SPDR Utilities Select Sector ETF (XLU) has experienced a decline of nearly 19% for the year. A more in-depth look at these sector ETFs uncovers interesting insights and trends, especially from a holdings and factor-based perspective, which investors may find valuable to consider.
Source: https://www.sectorspdrs.com/sectorcharting
In the table below you will see each of the sector ETFs, the Validea Factor Category (more on this below), the assets in the ETF, the number of holdings and then the top two positions. There are a number of things worth bringing to light now that we can see all this data in a snapshot view and as we look under the hood of these funds.
View the ETF Factor Report for the Sector ETFs
The Sectors Gathering Assets
The total assets allocated to the Technology, Energy, Health Care, and the Financial sectors collectively represent 65% of the total assets invested across all eleven sectors. One observation is the Energy (XLE) ETF, at $40 billion in assets under management (AUM), accounting for 17% of the total assets across all sector ETFs. It’s interesting in that energy stocks hold a significantly lower weight within the S&P 500, currently at approximately 4.8%.
Examining the asset levels within these ETFs and their divergence from the weights in the broader market cap-weighted index offers valuable insights into where investors may be actively positioning their sector bets. It also sheds light on areas where perceived value, momentum, or quality may be driving investment decisions — a consideration we can look at using the factor exposures in the following section.
Sectors and Factors
In most cases, the sectors align with factors that appear intuitive. Health care and Consumer Staples are associated with quality, while technology and consumer discretionary (particularly due to holdings like Amazon and Tesla) are linked to momentum due to the strong price performance in the underlying holdings. Utilities and materials tend to be associated with low volatility, while industrials and financials exhibit characteristics of multi-factor investments.
It’s crucial for investors to recognize that when they invest in Sector ETFs, they are effectively making an implicit bet on a specific factor. This is because, at any given time in the market, the underlying stocks within these sectors exhibit distinct factor qualities. Take energy, right now there are plenty of cheap stocks in the energy patch and so when we look at the energy names and score them through a value composite, which is a combination of PE Ratio, Price/Sales, Price/Book, Price/Cash Flow, EV/EBITDA and Shareholder Yield, it shows that XLE is in the top 6% of all ETF based on the cheapness of its holding. See the Factor Report for XLE.
Concentration and Weights Might Surprise You
Many investors may be surprised to find that a significant level of concentration exists within several sector ETFs, where substantial weight is allocated to the largest stocks. For instance, in the Energy sector (XLE), there are just 26 stocks, and the top two positions, Exxon and Chevron, collectively make up a substantial 40% of the fund’s weight. In the Communication Services sector (XLC), comprising 24 names, Amazon and Tesla contribute to 41% of the fund’s composition. Similarly, the Materials sector (XLB), with 32 stocks, has approximately 28% of its assets concentrated in two companies, Linde and Air Products & Chemicals.
Even within the Technology Sector ETF, which contains 60 different stocks, there remains significant concentration with Microsoft and Apple together making up approximately 47% of the ETF’s holdings. These instances underscore the importance of recognizing the level of concentration within sector ETFs, as it can significantly influence their performance and risk profiles.
Investing in Sectors
Allocating to sector ETFs can be a strategic move for active investors seeking to capitalize on specific market trends and opportunities. These ETFs provide a convenient way to gain exposure to various sectors of the economy, allowing investors to make targeted bets or adjust their investment allocations accordingly.
However, it’s essential for investors to delve beneath the surface and understand the dynamics of these sector ETFs. As we’ve seen, there can be significant variations in performance and concentration within different sectors. Factors such as quality, momentum, value, and volatility come into play, and investors should be aware that investing in sector ETFs implicitly involves a bet on these factors as well.
Sector Image Source: https://www.sectorspdrs.com/
