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Conservative Plays Top August’s Best Sector ETF Ideas


With Thursday’s 2% tumble, the S&P 500 finished July with a loss of almost 2.2%.

That could be enough to prompt investors to consider conservative sectors and the relevant exchange funds until U.S. stocks show the July swoon was no more than a mere bump on the road to more new highs.

Investors, both professional and retail, love sector ETFs. At least they did in the first half of this year when sector ETFs raked in $37.7 billion in new assets compared to $13.6 billion for broad U.S. market funds, Jackie Noblett reports for Ignites, citing Morningstar data. [Sector ETFs Balloon in Size]

However, the sector ETFs that are traditionally strong in August are showing signs of weakness. Making matters even trickier is that the two sector SPDR ETFs that historically the best in August are conservative, indicating that if weakness in these groups persists, that could be a bad sign for stocks.

Since 1999, the first full year in which the nine SPDRs traded, the Consumer Staples Select Sector SPDR (XLP) is usually the best SPDR in August, posting an average gain in the eighth month of the year of less than 1%, according to CXO Advisory.

It stands to reason that a low beta ETF like XLP would be a credible way to get through a lethargic month like August, but there could be more to staples ETFs than meets the eye. XLP fell 1.7% on heavy volume Friday, bringing its July slide to 3.5%.

On Thursday, Michael Batnick of Ritholtz Wealth Management noted that staples stocks this week are turning in “their worst performance since the Taper Tantrum of 2013.”

It is hard to say August’s second-best SPDR is looking any better. That would be the Utilities Select Sector SPDR (XLU) , which at one point this year was the best of the nine SPDRs. Now, XLU enters Friday coming off a 3.5% July decline.

XLU and the Vanguard Utilities ETF (VPU) fell below their 50- and 100-day moving averages on Thursday. [Sudden Slides for Popular Sector ETFs]

Adding to the element of intrigue surrounding XLP/XLU trade in August is this factoid: In September, the two ETFs are also, historically, the two best SPDRs, with XLU taking over the top spot, according to CXO.
Consumer Staples Select Sector SPDR