Defensive sector ETFs such as utilities, consumer staples and healthcare leading the market in 2013 have turned into laggards the past couple weeks.
It’s too early to say whether this is a full-blown rotation to cyclical stocks, but the seeds have been planted for a potential trend change.
Eddy Elfenbein at the Crossing Wall Street blog notes that defensive consumer stocks have performed very well year this but their relative performance has suffered a dramatic turn back since April 19.
“It’s unusual, but not unheard of, for defensive stocks to lead a rally,” he wrote. “The post-election rally seems to have continued in stride with a quick change in leadership. The change occurred just after the big plunge in gold.”
Investors could be moving away from traditionally defensive sectors that have been bid up to overvalued levels. Cyclical sector ETFs for energy, technology and materials have been outperforming since mid-April.
“Investors searching for higher yields are driving up the shares of dividend-paying companies, fueling a debate over whether these traditional haven stocks are getting dangerously expensive,” according to a recent Wall Street Journal report. “Some buyers argue that dividend stocks have entered a period where demand for income will keep valuations high, perhaps for years, thanks to Federal Reserve easy-money policies that are expected to remain in place at least into 2015. Skeptics say the ‘this time is different’ thesis will prove wrong, and that investors will discover they have overpaid.”
The chart below shows the year-to-date performance of the nine Select Sector SPDR ETFs versus the S&P 500. Consumer staples, healthcare and utilities have done well, but that edge has been slipping lately.
The relative performance charts of some of the sector ETFs against the S&P 500 show things have changed in recent weeks.
Utilities Select Sector SPDR (NYSEArca: XLU)