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5 Sector ETFs Surging to Start 2013

Zacks Equity Research

With the fiscal cliff averted, investors have gained confidence in the market and are more open to risky investments. U.S. stocks started the year on a strong note, while improving job and housing data resulted in stocks further gaining strength. In fact many equity ETFs experienced heavy inflows to start fiscal 2013 (Best and Worst ETFs to Start the Year).

Indeed, the S&P 500 rallied to a five-year high led by strong gains in a number of sectors. Last week the S&P 500 was up 8.31 points breaking the resistance level at 1,474 only to close at 1,480.94, its highest finish since December 26, 2007.

The strong momentum of the S&P 500 since the start of the year indicates that the bull may be back in the market. A number of market sectors have performed remarkably well in the year-to-date period, thanks to the market optimism.

In fact many of the nine main sectors of the S&P 500 have posted remarkable growth to date, suggesting that the positive sentiment is pretty widespread throughout the equity world.

With the overall bullish tone in the marketplace into the new year and strength in a number of segments, below, we highlight five S&P 500 industry ETFs which not only have managed to stay well in the green, but also provided a return above 4% YTD:

Healthcare Select Sector SPDR (XLV)

The U.S. healthcare sector is one of the potential bright spots as the country is one of the major markets for healthcare and one of the largest spenders on public health, putting the sector in an advantageous position (Four ETFs for Obama’s second term).

The sector had been in focus despite profitability remaining under pressure for many companies, and some policy uncertainty with regards to the Affordable Care Act.

In 2013, the sector is expected to remain in growth territory attributable to the aging population and higher rates of chronic disease, growing demand in emerging markets and new product launches.

Furthermore, the increase in the market size combined with rapid inorganic growth for many companies in the form of mergers and acquisitions will help to form a cordial coalition that would seek to make up for the decrease in revenue in the recent past, and address the issue for patent expiry for many of their key products.

In such a scenario, XLV can be an interesting option to play the U.S. healthcare sector. The sector has performed relatively well year to date delivering a return of 9.62%. In fact, XLV ended the year at a gain of 17.5%.

XLV boasts an impressive $5.6 billion in assets under management and distributes this asset base among 55 holdings. However, the allocation entails heavy concentration in the top ten holdings with a share of 57.15%.

Its top holdings include well-known bellwethers like Johnson & Johnson, Pfizer and Merck. In fact the top three holdings get one third of the asset allocation thereby playing a dominant role in the performance of the ETF.

The ETF represents a varied group of stocks that belong to pharmaceutical (48.19%), providers (19%), healthcare equipment and supplies (17.64%), healthcare providers & services (16.12%) and biotechnology (13.52%). The fund charges a fee of 18 basis points.


The retail industry is sure to benefit from an improving economy, an increase in consumer spending and better income levels as a function of higher employment (3 Overlooked Ways to Target Consumers with ETFs). Further, a recovery in the auto and housing market should positively impact the U.S. retail industry.

This is well evidenced by the December sales number which registered growth of 4.7% year over year. This is a far better showing from the summer low of 3.5% but still a long way to go from the level of 9.2% achieved 18 months back. The recovery in sales is yet to match earlier highs.

Investors can capitalize on the improving sales trend through a basket of securities.  In this context XRT appears to be one of the popular ways to play the trends in the industry.

XRT is one of the top performing ETFs in the retail sector beating all its peers in 2012. And it continues with its outstanding performance this year too delivering a return of 5.01% to date.

In fact, the ETF experienced a surge in heavy volume last week attributable to strong retail sales in December. The fund is now trading near its all time high.

XRT through an asset base of $922.03 million manages total holdings of 98 securities.The fund offers diversification as indicated by its holdings of nearly 12% in the top ten list. Rite Aid Corp, Office Depot and Supervalu represent the top three choices in the list. The ETF charges a fee of 18 basis points on an annual basis.

Financial Select Sector SPDR (XLF)

Financial sector ETFs were one of the best performing sectors in 2012. The sentiment for the sector has also remained bullish of late. The recent rally in the equity market was mostly attributable to the performance of financial stocks. The growth momentum is likely to sustain in 2013 (Financial ETFs Set to Rally in Earnings Season).

XLF is one of the popular ETFs tracking the financial sector and has been in the limelight attributable to its remarkable performance. The ETF is continuously trying to break out from its highs post-crisis.

The fund has performed exceptionally well in the last one year delivering a return of 28.5%. In the year-to-date period, the fund posted a gain of 4.63%.

The fund manages an asset base of $10.4 billion and trades at volume levels of more than 56 million shares a day.

XLF is home to 82 financial stocks with JPMorgan Chase, Berkshire Hathaway and Wells Fargo comprising the top three holdings with asset allocation of 8.49%, 8.35% and 8.22%, respectively. The fund charges a fee of 18 basis points.

Energy Select Sector SPDR Fund (XLE)

The U.S. Energy sector appears to be another lucrative opportunity to invest in 2013. It is a sector with strong fundamentals and low valuations. Also, energy stands to gain from profits from abroad (3 Energy ETFs for America's Production Boom).

If the market continues with its recent rally, the energy sector is certain to be a beneficiary. With the boost in oil production capacity by most drillers, the U.S. will once again become a leader in energy development.

To play this optimism in the sector, XLE can prove to be a good investing tool providing access to 45 energy companies with a heavy reliance on the top ten holdings for performance. The fund has nearly 65% of its asset base of $7.2 billion in the top ten holdings.

The fund has been a laggard for the most part of fiscal 2012 ending the year with a gain of 5.21%. But since the beginning of 2013, the performance has been remarkably good with year-to-date returns of 5.69%.

Among individual holdings, the top two companies, Exxon Mobil and Chevron Corp, take away the major chunk of the asset base with a total combined allocation of 33.63%. The fund charges a fee of 18 basis points annually.

Materials Select Sector SPDR Fund (XLB)

An ETF riding on the strong fundamentals of the material sector is XLB. XLB appears to be flirting with the above resistance levels and is experiencing heavy inflows. In fact the momentum in the ETF appears to be bullish (Could This Be The Year For These Mining ETFs?).

XLB has been a good performer in 2012 with a return of 14.74%. The ETF started the year on a strong note thereby posting a gain of 4.79% in the year-to-date period.

The fund’s asset base of $2.8 billion is spread across holdings of 32 securities. Monsanto is the largest holding in XLB, accounting for 11.3% of the ETF. Other top holdings include Du Pont de Nemours Co 9.0%, and Dow Chemical 8.3%.

The fund relies heavily on the chemical sector in which it has assigned an asset base of 71.2%. Metals & mining also get a double-digit allocation of 18.1%. XLB charges a fee of 18 basis points annually.

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