Two Sector ETFs That Should Work in January

With January finally here, fans of seasonal trends have plenty of options to choose from, particularly among sector exchange traded funds.

Stocks got off to an inauspicious start to 2014 on Thursday when all three major indices lost at least 0.8%. That could be taken as a sign that some exposure to more conservative sectors is a good idea in the first month of the year. The Health Care Select Sector SPDR (NYSEArca: XLV) obliges.

XLV, which was the second-best of the nine sector SPDR ETFs in 2013, trailing only its discretionary counterpart, is usually the best of the nine SPDRs in the first month of the year, according to CXO Advisory.

While XLV allocates a combined 28% of its weight to big pharmaceuticals stocks and Dow components Johnson & Johnson (NYSE: JNJ), Pfizer (NYSE: PFE) and Merck (NYSE: MRK), it may be another corner of XLV’s lineup that explains the ETF’s impressive January performances. Nearly 19% of XLV is devoted to biotech stocks and January is a fine month to be long that sub-sector because two major industry conferences, which often act as upside catalysts, take place this month. [QQQ Heads Toward Seasonal Sweet Spot]

CXO notes the second-best SPDR in January is the Technology Select Sector SPDR (NYSEArca: XLK). That makes sense as the PowerShares QQQ (NasdaqGS: QQQ), the NASDAQ 100 tracking ETF, is currently in its seasonal sweet spot. QQQ and XLK hold some of the same stocks, including Apple (NasdaqGM: AAPL), Microsoft (NasdaqGM: MSFT) and Google (NasdaqGM: GOOG).

January is the only month of the year in which XLV ranks among the top-two SPDRs, but XLK repeats the feat in June and October. [Tech Sector P/E Rising]

As for the two SPDR laggards in January, interestingly that dubious honor falls to two cyclical plays – the Industrial Select Sector SPDR (NYSEArca: XLI) and the Materials Select Sector SPDR (NYSEArca: XLB). In the case of XLB, it is usually the best SPDR in November and December and ranks second in February, so an argument can be made that the ETF takes something of a rest in January.