Markets

Energy, Materials ETFs Dive In Market Sell-Off

On a day where most market screens look like a crime scene, our Analytics heat maps paint a compelling picture. Sector rotations are taking place with some interesting winners and losers.

The near $5.00 sell-off in WTI crude oil has absolutely crushed the energy ETF complex, with the broad-based Energy Select Sector SPDR Fund (NYSEArca:XLE) down 6.2 percent as of 3:29 p.m. EDT. Investors particularly punished smaller companies within the space:the SPDR S&P Oil & Gas Exploration & Production fund (NYSEArca:XOP) was down 7.77 percent, while the SPDR S&P Oil & Gas Equipment and Services (NYSEArca:XES) was off 7.59 percent.

Energy was not the only area of the market suffering, however, with industrials down 6.31 percent and basic materials off 6.23 percent, as well.

In the spirit of trying to get defensive with sector allocations, the performance of the utilities and telecom sectors are telling. With the overall market off more than 5 percent for the day, the 1.64 percent decline of the Utilities Select Sector SPDR Fund (NYSEArca:XLU) is a sight for sore eyes. It comes as no surprise that the utilities sector would act defensively in a weak market, but the extent of today’s contrast could mark the beginning of a shift in market psychology.

Sector rotation strategies are certainly all the rage, but long-term allocation strategies drive the majority of portfolio performance over time. Should recent events in Europe, the Middle East and Washington, D.C. be enough to alter long-term growth projections for money managers, target allocations could change in a hurry. Bond allocations may ratchet up quickly, and equity exposure could be overhauled to focus on defensive economic sectors.

This is where funds like XLU will benefit most. The fund’s 4 percent yield is 65 percent higher than the market as measured by the S&P 500’s current 2.4 percent yield. A sideways- or downward-biased market is much easier to absorb as an investor if you are earning yield on a low-beta portfolio, exactly what XLU represents.

In the end, today’s action could be just market noise and not revealing of a major long-term shift in smart money allocations. As an investor though, it always bears watching how sectors are moving relative to each other because they may just be telling you what's happening before the economy does.

Energy, Materials sectors

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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