As we examine the market environment, exchange traded fund investors can consider tactical sector and industry exposures to help better position portfolios for what’s ahead.
“Sector dispersion has been elevated and remains above long-term averages, a potential benefit for sector rotation strategies,” Matthew Bartolini, Head of SPDR Americas Research, State Street Global Advisors, said in the recent webcast, Putting Sectors to Work in Uncertain Markets.
The technology sector has been a standout, surging 35.9% over the past year and attracting $14.9 billion in net inflows over the period. Benjamin Jones, Vice President and Senior Strategist, Macro Strategy Team, State Street Global Markets, pointed out that institutional interest has also helped sustain the momentum in technology and telecommunication services sectors over the second quarter. On the other hand, financials, consumer staples, and real estate were among the least popular plays.
Looking at Robinhood trading data, Bartolini noted that retail day traders favored cyclical sectors, and based on the median stock return held, this has led to above-market performance – Robinhood users’ median return since the market bottom was 54% compared to the S&P 500’s 45% return.
Bartolini also showed that tech valuations are stretched a result of strong momentum and earnings sentiment. Meanwhile, cyclicals like energy, consumer discretionary, and real estate have weak earnings sentiment. Health care stood out as it shows both attractive valuations and strong earnings sentiment.
Robert Forsyth III, Head of SPDR Americas Client Enablement Group, State Street Global Advisors, pointed out that so far, utilities, tech, health care, and consumer staples appear least impacted by the economic headwinds posed by COVID-19. On the other hand, all the other sectors exhibit significant negative earnings-per-share and sales growth estimates, notably the energy, financial, materials, consumer discretionary, and industrials sectors.
“Tech, health care, and materials have exceeded earnings expectations by large margins with the broadest earnings beat,” Bartolini said.
While segments like technology may have left other areas of the market in the dust, investors should beware of a potential value trap. Jones warned of scarce growth and low rates that weigh on the value outlook.
“We need to see higher rates before Value outperforms again,” Jones said.
As a way to help investors better navigate the current waters, Bartolini argued that investors should consider industry or thematic exposures that expand on sector coverage, help position based on macroeconomic trends smf capitalize on fundamental or technical trends.
For example, Forsyth highlighted the SPDR S&P Homebuilders ETF (NYSEArca: XHB) as a way to play the decreasing inventory of single-family homes and consistent demand that have forced home prices higher while easy Federal Reserve Policy has been friendly to mortgage applicants. The SPDR S&P Software & Services ETF (XSW) can capitalize on today’s more digitally-connected world, which will require more software and software will be the backbone of our new society, as shown by improving earnings and revenue estimates. The SPDR Kensho Clean Power ETF (CNRG) also plays on the idea that government regulations and shifting consumer preferences are causing a structural trend to green energy or reducing carbon emissions.
Bartolini also underscored post-pandemic trends, such as advanced health care, cybersecurity, and intelligent infrastructure. The SPDR S&P Biotech ETF (XBI) may be one potential bright spot as 1/5th of the industry works on a COVID-19 solution and rising growth estimates. The SPDR S&P Kensho Future Security ETF (NYSEARCA: FITE) will provide exposure to the growing demand for cybersecurity as Accenture estimates that $5.2 trillion will be at risk globally of cyberattacks from 2019 to 2023. Lastly, the SPDR S&P Kensho Intelligent Structures ETF (SIMS) provides access to the growth already expected for “smart cities” where global spending was previously estimated at $124 billion in 2020 – a 19% increase over 2019’s figure.
Financial advisors who are interested in learning more about market sectors can watch the webcast here on demand.