Financial ETF Challenging for 2013 Sector Leadership

May 31st at 3:30pm by Tom Lydon

Low-beta sectors such as utilities and consumer staples have had their time in the sun not only this year, but for several years now. Add health care to that list. Year-to-date, the best performer among the nine select sector SPDR ETFs is the Healthcare Select Sector SPDR (NYSEArca: XLV). Lead by impressive performances from Dow components Johnson & Johnson (NYSE: JNJ) and Pfizer (NYSE: PFE), among others, XLV is up 23.7% year-to-date.

Even with that run, XLV is close to losing its crown as the top-performing SPDR in 2013 because the Financial Select Sector SPDR (NYSEArca: XLF) has been narrowing the gap. After Thursday, XLF, the largest financial services ETF by assets, was just half a percent behind XLV. Signs of a cyclical rotation have been sprouting up over the past several weeks. The proof is in the pudding: Investors pulled cash from bank ETFs in April, but assets have come roaring back in this month. [Investors Selecting Cyclical ETFs]

It is not that XLV is wilting as much XLF is benefiting from investors’ departure from other sector funds. Through the first four months of this year, the Utilities Select Sector SPDR (NYSEArca: XLU) was a star performer, but XLU has gone from leader to laggard in May, shedding nearly 9% as investors have fretted about rising interest rates. [Utilities EF Down As Rates Rise]

Banks are not nearly as sensitive to rising interests as stodgy telecommunications and utilities stocks. Some banks can actually benefit from improved net interest margins when interest rates rise and that may be another reason XLF is on the rise. The ETF is gaining assets, too, attracting over $2.5 billion in new cash this year. [Investors Pump $700M Into Financial ETF]

As for its rivalry with XLV, XLF has been narrowing the gap for several months now. Over the past 90 days, XLF has outperformed the health care ETF by about 150 basis points. In the past month, the performance gap has noticeably widened. XLF is up almost 7% in that time, or better than double the returns offered by XLV.

In another sign of XLF’s strength, all three of its top-three holdings – J.P. Morgan Chase (NYSE: JPM), Berkshire Hathaway (NYSE: BRK-B) and Wells Fargo (NYSE: BRK) all hit new 52-week highs Thursday. That trio represents about 25% of XLF’s weight. Citigroup (NYSE: C) and Bank of America (NYSE: BAC) another 12.5% of XLF’s weight, also touched new highs Thursday indicating that XLF is indeed in rally mode.

Financial Select Sector SPDR

ETF Trends editorial team contributed to this article.

Tom Lydon’s clients own PFE.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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