Buy These ETFs to Profit from the 'Sector Rotation'
Investors have been pouring a lot of money into relatively “safer” or so-called “defensive” sectors during the last few months. These sectors have also benefited from investors’ insatiable appetite for yield in the current rock-bottom interest rate environment, as most of the companies in these sectors are mature, slow-growing, dividend paying companies. (Read: Invest like Warren Buffett with these ETFs)
As a result, valuations of these sectors have soared and some of them look overpriced now. Defensive sectors like healthcare, staples and utilities are now trading at an average premium of more than 10%, up sharply from ~40% discount to the broader market in 2009.
On the other hand, many fast-growing sectors have largely been ignored by investors. But the trend appears to be changing now. Fund flow trends and sector returns for the last month show that investors are slowly moving into “riskier” corners of the stock market. (Read: Time to but these top ranked retail ETFs?)
Once the economic picture begins to improve, many more investors would be tempted to move to cyclical stocks. It may be the right time for investors to look for sector with brighter longer-term growth potential, which look rather attractively priced now.
At the same time, some portfolio allocation to defensive sectors is warranted as those sectors will continue to perform well if economic recovery shows signs of slowing down. (Read: Buy these ETFs for higher returns and lower risk)
Sector | ETF | Year to date return | 1 month return | 1 month flow (million) | FY 1 P/E* |
Utilities | XLU | 16.32% | 1.31% | -3.74 | 16.47 |
Consumer Staples | XLP | 21.31% | 5.17% | -386.24 | 18.23 |
Healthcare | XLV | 24.23% | 4.82% | -534.74 | 15.84 |
Technology | XLK | 10.37% | 6.16% | 401.39 | 14.24 |
Industrials | XLI | 15.87% | 8.00% | 43.67 | 15.32 |
Materials | XLB | 9.68% | 9.92% | -192.27 | 15.31 |
*Based on forecasted fiscal year earnings, Source: SPDR website
Vanguard Information Technology ETF (VGT)
Launched in 1998, this is one of the largest and most liquid products in the technology ETFs space. It manages about $3 billion in assets, which are currently invested in 414 holdings.
The fund is top-heavy with more than 55.9% assets invested in its top holdings. Apple, Microsoft, Google and IBM are the top four holdings. With just 14 basis points annual expenses, this is the cheapest technology fund.
VGT is currently a Zacks Rank#1 (Strong Buy) ETF.
Materials Select Sector SPDR Fund (XLB)
XLB is the largest fund in the materials funds space, with about $2.9 billion in assets. The product holds just 30 securities in its basket, with largest weights assigned to Monsanto, Du Pont and Dow Chemicals.
It charges an expense ratio of 18 basis points per annum and currently has an attractive dividend yield of 2.16%.
XLB is currently a Zacks Rank#3 (Hold) ETF.
Industrial Select Sector SPDR Fund (XLI)
XLI is home to about $4.9 billion in assets, currently invested in 60 securities. General Electric, United Technologies and Union Pac are its top three holdings. Aerospace & Defense, Machinery and Industrial Conglomerates are the top sectors the fund has invested in.
It charges an expense ratio of 18 basis points per annum and currently has a reasonable dividend yield of 2.00%. Further, it trades in high volumes resulting in low bid-ask ratios.
XLI is currently Zacks Rank#1 (Strong Buy) ETF.
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