ETF Trends
ETF Trends

July is here and although the seventh month of the year sits firmly in the weakest six-month period for stocks, conventional wisdom dictates that if a summer rally is going to happen, it will happen in July.

July marks the start of second-quarter earnings season, so it is easy to understand why this month can spark a summertime rally. There are also favorable seasonal trends to be had right away. “From 1950 to 2013, the market has delivered a positive returns 72% of the time during the last two days of June the first five days of July, according to Brooke Thackray, a research analyst with Horizons ETFs and the author of Thackray’s Seasonal Investment Guide. [Prep for a Fourth of July Rally]

For investors that do not want to make earnings season bets or load up on quick trades this week, there are some sector ETFs that tend to hold up better than others this month.

Of the nine sector SPDR ETFs, the Materials Select Sector SPDR (NYSEArca: XLB) is the usually the best of the bunch in the month of July. XLB has posted an average July gain of just over 1% going back to 1999, according to CXO Advisory.

XLB just posted a second-quarter gain of 5% and has admirably fought off recent weakness in DuPont (NYSE: DD). The Dow component is XLB’s third-largest holding at a weight of almost 10%.

However, investors should be careful with XLB. While the ETF is often a rewarding July idea, it is the worst performer of the nine SPDRs in August and September, according to CXO. In addition to July, XLB is also the best of the nine SPDRs on a historical basis in November and December and second-best in February.

The struggling Financial Select Sector SPDR (NYSEArca: XLF) ranks as the second-best SPDR in July. XLF, the largest U.S. sector ETF, posted a second-quarter gain of 1.4% and could live up to its July billing if the financial services sector can deliver some upside earnings surprises, something it did not do much of in the first quarter. [Bank ETFs Face Hurdles]

“The diversified financials services industry had earnings declines of 43% relative to the prior year. This industry weakness also masked the 20% and 19%, growth for the Real Estate Investment Trusts (REITs)and insurance industries.,” said S&P Capital IQ. [Q1 Earnings Growth Leaders Among ETFs]

XLF gained over 2% last month, which is not too shabby considering it is usually the worst of the nine SPDRs in June. It is the best of the nine in March and second-best in April, according to CXO.

Materials Select Sector SPDR