After a rocky week for U.S. stocks that saw the S&P 500 endure its worst one-day performance since 2011, hopes for cyclical rotation may have taken some damage. However, those hopes are not completely dashed because some sector ETFs that would be prime beneficiaries of a legitimate cyclical rotation have outperformed lower beta funds over the past month.
Defensive sectors such as consumer staples and, in particular, utilities have taken their lumps over the past few weeks with Utilities Select Sector SPDR (NYSEArca: XLU) down 6.9% in the past month. The Technology Select Sector SPDR (NYSEArca: XLK) has only been half as bad.
Over the same time, the Consumer Staples Select Sector SPDR (NYSEArca: XLP) is off 4.6%, but the Financial Select Sector SPDR (NYSEArca: XLF) looks good by comparison with a loss of less than 3%. [A Dividend ETF for the Cyclical Rotation]
“As more crowded trades, defensive sectors are potentially more sensitive to investor sentiment and could experience greater price volatility,” said iShares Global Chief Investment Strategist Russ Koesterich.
Investors looking to fill out the international portions of their portfolios while capturing some cyclical rotation exposure have options, including the following ETFs.
iShares S&P Global Energy Sector Index Fund (NYSEArca: IXC)
An investment in IXC does not mean sacrificing exposure to U.S. energy stalwarts such as Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX) as the two largest U.S. oil companies combine for 23.6% of the ETF’s weight. However, IXC does mix in major European integrated oil names such as BP (NYSE: BP) and Royal Dutch Shell (NYSE: RDS-A).
In terms of yield, the international exposure afforded by IXC works in investors favor because the European oil giants usually feature higher yields than their U.S. counterparts. IXC has a trailing 12-month yield of 2.42%, which is almost 35 basis points better than the Energy Select Sector SPDR (NYSEArca: XLE). [Energy ETFs Offer Attractive Yields]
iShares S&P Global Industrials Sector Index Fund (NYSEArca: EXI)
On the back of impressive performances by Dow components Boeing (NYSE: BA) and General Electric (NYSE: GE) along with Union Pacific (NYSE: UNP), the U.S. industrials sector has been solid this year. That is a good thing for EXI. The fund has also gotten a lift from its weight to Japan. Combined, the U.S. and Japan represent nearly two-thirds of the ETF’s weight, which has been good news for the ETF as those have been two of the best-performing equity markets in the developed world.
EXI’s exposure to Australia, Canada and the Eurozone explains why the fund has lagged U.S. counterparts. However, Eurozone industrial production rose for a third straight month in April with the bulk of those gains attributable to the region’s two largest economies, Germany and France. Those two countries combine for over 9% of the fund’s weight.
Industrial production in the U.K., EXI’s third-largest country weight, also posted a small, surprise increase in April. Europe has taught investors some hard lessons over the past several years, among them that news flow there can turn on a dime. However, if improving economic news becomes the norm, EXI could benefit.
iShares S&P Global Industrials Sector Index Fund
