Every now and then, I like to check in on sector funds — specifically the SPDR sector ETFs.
It’s just a good idea to keep an eye not just on individual stocks, but broad sectors to see what’s performing and what’s struggling. It can give you a sense of market sentiment, how the economy is performing and how investor psychology is operating.
I believe in maintaining a long-term diversified portfolio. However, there is a place for SPDRs and other sector ETFs in both that strategy, and for those accustomed to shifting allocations around based on what the sectors are telling us.
There are only nine SPDR funds, so these are broad sector choices we’re talking about. There are, of course, hundreds of ETFs that hold highly targeted subsets of these sectors, for those interested in investing in areas they may hold specific expertise in.
As for the actual SPDR sector funds? I’m looking at three that I think should outperform over the next year or so.
Sector SPDRs to Buy: Financial SPDR (XLF)
Financials got a deservedly bad rap during (and just after) the financial crisis. A lot of firms were in deep trouble, and solvency was a very real concern for many.
Now, however, we are six years out and the cream has risen to the top.
Financial services are an integral part of our everyday lives. That applies to people globally, not just here in the U.S. While individual issues may struggle from time to time, that’s the benefit of an ETF — you get diversification. For the entire sector to blow up again, however, it’s going to take some kind of real disaster.
Because of the crisis, the XLF SPDR has only a 2.54% annualized return since inception (1998). The five-year return of 10.1% is seventh, but the three-year return of 18.13% puts it in third place. I think more outperformance is ahead.
The XLF, as well as the rest of these SPDRs, charge expenses of 0.15%, or $15 for every $10,000 invested.
Sector SPDRs to Buy: Energy SPDR (XLE)
Like financial services, energy is an absolutely necessary part of human existence. Fossil fuels aren’t going away. But just like the financial sector blew up, the energy sector is in the midst of a major swoon because of the oil price crash.
Since inception, even including the latest crash, the XLE SPDR is still the top performer of all SPDRs with a 9.77% annualized return. Alas, the crash dragged its one-, three- and five-year returns into last place, at -9.82%, 7.22% and 8.66%, respectively.
Nevertheless, energy is going to bounce back. Oil prices will recover somewhat. The best of the best in energy — which makes up the top 20 or more holdings in the sector — will survive forever. Holdings like Exxon Mobil Corporation (NYSE:XOM), Chevron Corporation (NYSE:CVX) and Schlumberger Limited (NYSE:SLB) have strong balance sheets and ample cash flow.
I think you buy XLE here and hold for a long time, and wait for a recovery as we’ve seen with financials.
Sector SPDRs to Buy: Health Care SPDR (XLV)
With or without Obamacare, the healthcare sector almost has to keep moving higher. Healthcare only will get more expensive. Someone has to pay those costs, whether it be people, insurance companies or governments. That means healthcare stocks get fed with revenue from someone.
Certainly, Obamacare seems to have only helped. The XLV was already the second-best all-time performer ofthe SPDRs, at 8.36%. It’s far ahead of all the others in other time frames. Its one-year return is 25.04%, three-year performance is 26.19%, and it’s 0.51% for the five-year period.
Even if Obamacare blows up, which I believe it will, somebody still has to pay for healthcare. Technological advances are only making healthcare more expensive — and that’s yet another reason to buy the XLV.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. He is the manager of the forthcoming Liberty Portfolio, has 20 years’ worth of experience in the stock market and has written more than 1,200 articles on investing. As of this writing, he did not hold a position in any of the aforementioned securities. This article is for informational purposes only and does not constitute an offer or solicitation to buy or sell shares or securities in any company mentioned. This article does not constitute investment advice. The author has not received compensation, directly or indirectly, current or prospective, from any known issuer, underwriter, or dealer in conjunction with the writing of this article. Do your own due diligence and confer with your financial advisor before buying or selling any security. He can be reached at TheLibertyPortfolio@gmail.com.