3 Sector ETFs Surviving This Slump - ETF News And Commentary

It has definitely been a rough couple of days in the stock market. The S&P 500, as represented by SPY, has lost about 2.3% in the past five days, a shift in the trends that investors have seen for much of 2013.

The slump has been pretty broad based as well, with many key segments—such as technology and financials—leading the way on the downside. In fact, tech (XLK) and financials (XLF) were both down more than the broad market in this turbulent time, as XLF slumped 2.65% and XLK lost 3.2% in the time frame.

What’s behind the slump?

There are few reasons for the recent rough patch in the market, stretching from global growth concerns to more domestic-focused issues. Beyond these problems, earnings results also played a role in the market uncertainty as of late (read 4 Best ETF Strategies for 2013).

Looking abroad, Chinese growth concerns earlier in the week weighed on the market, as these pushed down companies with heavy operations in that nation, and especially commodity producers and natural resources. European growth concerns also came into play, helping to push the IMF’s global growth forecast down 20 basis points to 3.3% for the 2013 calendar year.

Back at home, weak earnings also pushed stocks down across the board, as banking giant Bank of America missed estimates, while Cirrus Logic’s report suggested weakness for Apple’s report later this month. These figures from two of the biggest names in the market helped to drag down both financials and technology and put a gloomy tone over the rest of the market this earnings season.

Bright Spots

Yet, while many sectors have seen terrible performances over the past week, investors in a few niches did experience neutral to positive performances. While they weren’t anything too extreme—less than 1% gains across the board—they did represent a huge outperformance when compared to the sluggish showing from the S&P 500 (see 3 Multi-Asset ETFs for Juicy Yields and Stability).

So for investors looking for new safe havens, the following three sector ETFs could make for some excellent picks. This is especially true given the recent performance in the precious metal market, as clearly many investors are in need of better options that can hold up during turbulent conditions.

Health Care (XLV)

Over the past five days, this broad ETF has managed to post a gain of 23 basis points. While this might not sound like a lot, it is important to remember that this represents an outperformance level of roughly 200 basis points when compared to SPY in the same time frame.

The fund’s resilience probably rests in its focus on a defensive sector and large cap names in the space. The weighted average market cap for the ETF’s holdings is just under $100 billion, so clearly we are dealing with some large firms in this health care product.

This is done by tracking the S&P Health Care Select Sector Index, a broad benchmark of health care firms. This results in holdings in 55 companies, with a gross expense ratio of just 18 basis points a year.

Top industries are concentrated in the pharmaceutical space as these firms make up roughly 50% of the portfolio. Equipment and providers of health care each make up roughly 16% of the fund as well, while biotech companies also account for a similar percentage (see 5 Sector ETFs Surging to Start 2013).

Top holdings are also relatively concentrated, as Pfizer and Johnson & Johnson combine to make up one-fourth of total assets. Still, even with this concentration, the fund has certainly proven itself as of late, putting up a pretty good performance in light of global worries.

Utilities (XLU)

For much of 2013, XLU has lagged behind its counterparts as investors pushed towards higher beta segments. This has reversed in recent days, as now XLU is ahead of SPY on a year-to-date basis.

The fund is down just a few basis points in the past five days, compared to the heavier losses for the more volatile sectors in the same time period. Further, XLU is currently paying a 3.5% dividend yield, a rate that is far higher than in other corners of the market.

This is accomplished by following the S&P utilities select sector index, a broad benchmark of electric utilities, multi-utilities, independent power producers, and gas utilities. Expenses for this fund are also 18 basis points a year, while total holdings come in at just 33.

Given this low figure, it shouldn’t be too surprising to note that the fund is heavy in electric utility firms and a few securities in total. In fact, Duke Energy, Southern Company, and Dominion Resources combine to make up roughly one-fourth of the total in this popular ETF.

But, like others on this list, this has proven to be a winning strategy as of late, as high income and a defensive sector has been in vogue during the turbulent market trading of the past few days.

Biotech (XBI)

Biotechnology isn’t exactly the first segment that comes to mind when most investors think of ‘defensive’, but it has acted as such over the past few days. XBI has managed to gain about 80 basis points in the trailing five days, crushing the market in the time period (read Gilead Puts Biotech ETFs in Focus).

If that wasn’t enough, the ETF has also seen a steady level of outperformance over the long-term, crushing the market over more extensive time periods. This is despite paying a paltry dividend—so it hasn’t ridden the yield wave—while being slightly more expensive than its peers on the list at 35 basis points a year.

In terms of holdings, the ETF is quite spread out, tracking the S&P Biotechnology Select Industry Index which is a modified equal weight benchmark. And before investors think this is quite similar to XLV, it is important to remember that just 15% of that fund’s assets are in the biotech space.

This suggests that this ETF will be a quite different play than its broad health care cousin. Particularly since the equal weight method puts many more assets into small and mid cap stocks, firms that usually aren’t safe havens, but nonetheless have managed to shake the trend permeating the broad market as of late.

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SPDR-SP 500 TR (SPY): ETF Research Reports

SPDR-SP BIOTECH (XBI): ETF Research Reports

SPDR-FINL SELS (XLF): ETF Research Reports

SPDR-TECH SELS (XLK): ETF Research Reports

SPDR-UTIL SELS (XLU): ETF Research Reports

SPDR-HLTH CR (XLV): ETF Research Reports

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