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As the global equity markets experience unprecedented volatility and remain under siege due to COVID-19, I thought it might be interesting to look at how certain sector Exchange Traded Funds, or “ETFs”, have performed over time vis-a-vis the broader S&P 500 index.
If you wish to invest (or re-invest) in equities, one alternative that offers low fees and good diversification is passive ETFs, many of which are set up to mirror major stock exchange indices like the S&P 500, the Russell 2000, the FTSE 100 or the Euro STOXX 600. The three largest sponsors of ETFs are Vanguard (arguably the pioneer of low-fee passive investing), State Street (SPDRs) and Blackrock (iShares). Although investing in passive index funds - including ETFs, UIT’s or mutual funds - offers many advantages, investors are now discovering that in times of panic selling, these passive index funds are being forced to sell or rebalance their underlying holdings across the board due to rather severe one-directional outflows. This means that all of the positions are indiscriminately sold to create liquidity and, at the same time, retain the market-weighting of the portfolio holdings. The advantage of sector funds, as opposed to broader index funds, is that you can invest in the sectors that you think might perform relatively better when the market turns and steer clear of (or short) those sectors that are currently under severe stress and are likely to remain so. This post is focused on the 11 select sector SPDR funds to help you gain a better understanding of their attributes, holdings and performance vis-à-vis the broader S&P 500 index.
The sector funds (and S&P 500 index fund) I have used in my analysis is from the State Street Global Advisors stable of sector funds, known as “SPDRs”. All of the historical data was retrieved from either Yahoo Finance or from the ”Fund Finder” section of State Street Global Advisors. CNBC also has a good summary page which might interest you, and you can find that here. CNBC even has an app you can download to track performance of the funds.
I will present three sets of tables below. The first table contains attributes of the 11 Select Sector SPDR funds, including AUM, yield and valuation metrics, as of March 23 or March 24. The second table illustrates performance over time, including returns since the inception of each fund. Most of the SPDR Select Sector ETF’s were established in 1998, but two – Communication Services (June 2018) and Real Estate (October 2015) - were established later. (The S&P 500 index SPDR (SPY) was set up in January 1993). The third table – or actually a series of 11 tables – provides more detailed information on each of the 11 sector funds, most importantly the names and concentration of their top 10 holdings.
Before getting started, here are some interesting summary points.
The Select Sector SPDR funds are based on the the Global Industry Classification Standards (GISC), established in 1999 and determined by S&P Dow Jones Indices and MSCI. The GISC consists of 11 sectors, 24 industry groups, 68 industries and 157 sub-industries. You can find more information on the GISC at the MSCI website here.
The Technology sector fund (XLK) accounts for 26% of the total S&P 500 index fund (SPY), nearly double the size of the next largest sector fund, Healthcare (at 14.8%)
The relative outperformers (vis-à-vis the SPY) over various time frames including from inception have been Consumer Discretionary, Consumer Staples, Healthcare, and Technology. The relative outperformers YtD, during this difficult patch have been these four sectors plus Communications Services and Utilities. Energy has been a significant drag and has consistently underperformed over all periods.
You might be surprised at some of the holdings. For example, Facebook, Google and Netflix are all in the Communications Services sector alongside Verizon and AT&T, not in the Technology sector. The Technology sector contains Microsoft and Apple as you might expect, but also the payment companies like VISA, Mastercard and PayPal. Both Amazon and Bookings.com are in Consumer Discretionary, which makes sense although they are often thought of firstly as technology companies. The largest Financial Sector component is Berkshire Hathaway, just ahead of JP Morgan. And lastly, when you think “healthcare” you might immediately defer to hospitals, but of course the top holdings in the Healthcare sector are all pharmaceutical companies.
As you might expect, the Energy, Real Estate and Utilities sectors have the highest yields, with the first two – at least in my opinion - most certainly headed towards reductions as this crisis unfolds. Communications Services, Technology and Consumer Discretionary – three of the best overall performers - have the lowest dividend yields.
If you are wondering about the airlines and air freight companies, they are in the Industrial sector.
All of the funds have very low expenses of 0.13%/annum, compared to the S&P 500 SPDR of 0.0945%/annum.
The first table below illustrates some basic attributes of each of the 11 Select Sector SPDR ETFs, including AUM, dividend yield and several valuation metrics. To provide some perspective, some interesting metrics on the S&P 500 SPDR index (SPY) as of March 24th, 2020 are: AUM, $226.1 bln; P/E ratio of 15.25x; price/book of 2.54x; and dividend yield of 2.60%.
The second table below shows performance of the Select Sector SPDR ETFs over various periods of time, including from inception for each of the 11 funds. Those that have outperformed the S&P 500 SPDR ETF are highlighted in green for each period.
There is one important caveat that you should note when looking at these returns. When GISC changed their classifications in 2016 (added Real Estate) and 2018 (renamed Telecoms to Communications Services and altered holdings), I am not sure how the legacy holdings which were moved from existing SPDR sector funds to the newly-created or renamed funds were handled as far as presenting historical prices in Yahoo Finance.This means that the reliability of the historical return data is somewhat suspect prior to mid-2018 when Communications Services was created.The Communications Services fund essentially replaced the Telecoms fund and broadened its mandate to include interactive media and online marketplaces, amongst others.Names like Facebook and Google (Alphabet), along with others, were moved into this sector from other sectors (Technology and Consumer Discretionary). In 2016 with the creation of the Real Estate sector fund, real estate companies were reallocated mainly from the Financials sector, which was also then rejiggered.
This last series of tables in rather long because it contains a chart for each of the 11 Select Sector SPDR ETF funds. These tables contain the top 10 holdings of each fund by name, and the concentration of these 10 holdings as an overall percentage of the fund’s portfolio.
