After recording a short pullback, the S&P 500 once again
returned to growth thereby recording multiple sessions of gains
and closing at multi-year highs. This recent rise in the
benchmark index was mostly led by encouraging data on home prices
and rising consumer confidence (
2 Popular ETFs to Avoid in May
The technology sector has also added to the positive momentum
in the index, as Apple takes the initiative for the largest
non-bank bond sale in history while it also looks to return
cash to shareholders as well. On the earnings front, events have
turned around in the past few days, with more companies beating
and the earnings season turning out a little better overall.
The strong momentum of the S&P 500 since the start of the
year surely indicates that the bull is back in the market. A
number of market sectors have performed remarkably well in the
year-to-date period, riding on market optimism.
In fact, equities may continue to experience a huge amount of
inflows as the Fed is expected to continue with its bond
buying policy to stimulate the economy and keep the interest
Investors should note that with the U.S. market at all time
highs, it is the defensive sectors of the economy which are
leading the market. All the three defensive sectors - healthcare,
consumer staples and utilities - have recorded strong
year-to-date gains beating the broader market index (
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Defensive sector stocks generally deliver strong returns when
investors perceive that the markets are in trouble. But 2013
seems to have changed the trend with defensive stocks leading the
market. This may be due to their ability to return cash to
shareholders when bonds have turned expensive. With this
backdrop, let's take a look at each of the sectors in a little
greater detail below:
The companies under the consumer staples sector sell
relatively low-margin products that consumers use frequently in
their daily lives, including food, beverages and products for
personal hygiene or household cleaning (
Can the Consumer Staples ETF Go Higher
The purchase of these necessities is generally stable over
time, irrespective of the spending patterns or whether the
economy is expanding or contracting.
The consumer staples sector is outperforming the broader
market index. It has been a favorite pick for investors as
evidenced by the recent run-up in the sector's stocks. The strong
fundamentals for the sector are also showing up in positive
Some of the companies in the sector have been able to deliver
impressive results and have the potential to grow in the upcoming
quarters as well, especially if emerging markets get back on
With that being said, one way to tap the positive momentum in
the sector is through basket form. In this context,
Consumer Staples Select Sector SPDR Fund (
represents a good investment opportunity.
The Consumer Staples Select Sector SPDR Fund is the oldest
product in the space with a high liquidity level which provides
exposure to the consumer sector at the lowest cost. The ETF seeks
to provide investment results that correspond generally to the
price and yield performance, before fees and expenses, of the
S&P Consumer Staples Select Sector Index.
The fund has delivered a very strong performance in the
year-to-date period and has outperformed the broader market index
as well. The fund's year-to-date returns stand at 15.2% (
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The product appears to be liquid as more than seven million
shares change hands on a daily basis. The fund invests its $7.2
billion assets in a small basket of 44 stocks.
The fund appears to be quite concentrated in the top 10
holdings as 64.8% of the asset base goes towards these 10. In
fact, the top three holdings have a share of 33.63% in the
Food & staples retailing gets the first preference in
terms of sector allocation. For this exposure, the investor pays
an expense ratio of 18 basis points, one of the lowest in the
space. XLP provides a yield of 2.63%.
Utilities is another sector which has put up a very strong
performance in 2013. The rise in population has led to an
increasing demand for essential utility supplies.
Here utility companies step in with their ability to generate
essential supplies in large volumes and cater steadily to the
needs of their customers. The utility companies generally
comprise of electric, gas, water and integrated service providers
So Much for Safety: Utility ETFs in Bear
As per the most recent U.S. Energy Information Administration
(EIA) report, global energy use will increase to 770 quadrillion
British thermal units (Btu) in 2035 from 505 quadrillion Btu in
2008. The projected increase in the global demand for power will
also necessitate massive investment in the utilities over the
next couple of decades.
In the light of the above statement, investors should consider
Utilities Select Sector SPDR (
. XLU has been a strong performer in the year-to-date period
delivering a return of 11.4%.
Launched in late 1998, XLU seeks to match the price and yield
performance of the Utilities Select Sector Index before fees and
expenses. The fund holds 33 securities in all and has net assets
of $6.5 billion.
The ETF is appropriate for those investors who are looking for
a targeted bet on regulated utilities, as well as independent
producers and traders of power. XLU is by far the biggest as well
as the most liquid ETF targeting this space, as indicated by its
average daily volume of about 7.5 million shares.
Additionally, the fund targets the large cap space of the
sector, focusing its assets on the biggest companies. Partly due
to this, the ETF is slightly concentrated in its top 10 holdings
with 57.6% going to these stocks, a still reasonable level
considering that it holds 33 securities in total.
XLU pays out a good yield of 2.71% per annum and charges
investors a paltry 18 basis points in fees and expenses (
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The U.S. healthcare sector is one of the potential bright
spots as the country is one of the major markets for healthcare
and one of the largest spenders on public health, putting the
sector in an advantageous position.
The sector has been in focus despite profitability remaining
under pressure for many companies, and some policy uncertainty
with regards to the Affordable Care Act and its implementation
over the next year months.
The segment is expected to remain in growth territory in 2013,
given the aging population and higher rates of chronic diseases,
growing demand in emerging markets and new product launches as
In such a scenario,
Healthcare Select Sector SPDR (
can be an interesting option to play the U.S. healthcare sector.
The sector has performed relatively well year to date delivering
a return of 19.5% (
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XLV boasts an impressive $7.9 billion in assets under
management and distributes this asset base among 56 holdings.
However, the allocation entails heavy concentration in the top
ten holdings with a share of 57.93%.
Its top holdings include well-known bellwethers like Johnson
& Johnson, Pfizer and Merck. In fact the top three holdings
get one third of the asset allocation thereby playing a dominant
role in the performance of the ETF.
The ETF represents a varied group of stocks that belong to
pharmaceutical (48.19%), healthcare equipment and supplies
(17.64%), healthcare providers & services (16.12%) and
biotechnology (13.52%). The fund charges a fee of 18 basis
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SPDR-SP 500 TR (SPY): ETF Research Reports
SPDR-UTIL SELS (XLU): ETF Research Reports
SPDR-HLTH CR (XLV): ETF Research Reports
SPDR-CONS DISCR (XLY): ETF Research Reports
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