The Materials Select Sector SPDR (NYSEArca: XLB) is up an astounding 26% over the past three months while its consumer discretionary counterpart, the Consumer Discretionary Select Sector SPDR (NYSEArca: XLY), is higher by 10% over the same period. Leadership from those high beta sectors is seen as potentially stoking a rally in stocks.
The materials space is also suffering from depressed commodity prices, but not to the same extent as energy. For instance, chemical or fertilizer producers are experiencing lower earnings growth due to lower agricultural prices. However, chemicals and fertilizer makers are helping drive ETFs like XLB higher.
After a correction in stocks earlier this year, some may be stepping back into a cheaper market. According to the Bank of America, investors lowered equity holdings this year and cut banks at the quickest rate in almost a decade on the market fall off while raising cash allocations to their highest level since November 2001.
Consumer discretionary is one of just four sectors expected to post positive earnings growth this year. S&P Capital IQ currently holds a market Overweight rating on the consumer discretionary, health care and telecommunication services S&P sectors.
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XLY, the largest consumer discretionary ETF by assets, includes exposure to retail firms, restaurants, media companies, apparel and luxury goods companies, automobile manufacturers and leisure industries.
Retailers make up a large portion of the underlying holdings. E-commerce and greater mobile commerce usage has also been a big game changer in the industry, especially with more consumers using online sources like Amazon, which XLY holds.
“After health care, the most recent graduate to the leadership ranks is basic materials. The Basic Materials Select Sector SPDR ETF (XLB) broke through its April 2015 trendline last month and this week breached important chart resistance,” reports Michael Kahn for Barron’s.
As Barron’s notes, the discretionary group has been hindered by restaurant stocks.
“We can blame retail for a big portion of the performance problem. The Dow Jones U.S. Restaurants index, on the other hand, actually soared to a 52-week high with mostly solid technicals. Even after its nice gains it continues to lag the S&P 500 since the start of the year,” according to Barron’s.
XLY was the top performer among the sector SPDR ETFs last year with a gain of about 10% while XLB was one of the worst performers.
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