3 Top Industry Sectors to Grow Your Money
By Ron DeLegge, Editor
June 8, 2009
SAN DIEGO (ETFguide.com) – We’ve already reached the half-way point of the year and the top performing U.S. industry sectors are rising much higher than many people, even Wall Street’s leading economists and analysts previously thought. Even though the economic recession is far from over, astute investors are profiting. Are you?
Boosted by a rising market, the money invested in ETFs finished the month of May on a very strong note, up by $53 billion. Much of the greatest interest in ETF investing is in funds that narrowly invest in specific industry sectors. Energy and technology stocks are just two examples of sectors that have performed well so far this year. Today, there are 205 industry sector ETFs and that doesn’t even include the 90 or so leveraged and short ETFs focused on specific sectors.
So far for the year, five of the nine S&P 500 industry sectors are in positive territory. This is a dramatic reversal from last year when all nine S&P sectors posted double digit market losses. Let’s analyze three of this year’s top performing industry sectors.
Materials Select Sector SPDR (NYSEArca: XLB)
The basic materials sector is one of the S&P 500’s smallest. XLB represents just 3.66% within the S&P. Nevertheless, this tiny sector has given investors the best pop for their money this year, gaining 21.81%. This sector includes industries such as chemicals, construction materials, containers and packaging, metals and mining, and paper along with forest products. Among its largest components are Monsanto, E.I. DuPont de Nemours & Co., and Dow Chemical Co.
Year-to-date, XLB has soared 21.81%. In 2008, XLB declined 43.99% and the fund’s annual expense ratio is 0.21%.
Technology Select Sector SPDR (NYSEArca: XLK)
With a 21.51% weighting, technology stocks are the largest industry sector represented within the S&P 500. XLK owns 80 leading technology stocks like Apple, IBM, Oracle, Microsoft, Yahoo and others. Technology is a diverse sector which covers IT consulting services, Internet companies, semiconductor equipment, software developers, computers and peripherals, telecommunication services and wireless products.
So far this year, XLK has gained 19.59% compared to a 41.39% loss in 2008. XLK’s annual expense ratio is 0.21%.
Consumer Discretionary Select Sector SPDR (NYSEArca: XLY)
Unlike the defensive consumer staples sector (NYSEArca: XLP), consumer discretionary stocks are more prone to wild swings and downturns because of their heavy reliance on consumer spending. Despite a severe reduction in consumer’s spending habits, XLY is surprisingly one of this year’s best performing industry sectors. XLY includes industries such as automobiles and components, consumer durables, apparel, hotels, restaurants, leisure, media, and retailers. Stocks among XLY’s portfolio are McDonald's, Walt Disney Co., and Comcast.
XLY has jumped 11.88% on the year compared to a 33.43% loss in 2008. XLY’s annual expense ratio is 0.21%.
Making the Right Sector Choices
Investors need to be very selective about which industry sectors they decide to own. During the dotcom bust from 2000 to 2002 finding areas of sector strength were easier to identify because avoiding technology stocks was all you had to do. In today’s environment it’s more difficult because the global economic recession is affecting all industries.
Recently, a traditional sector rotation strategy of overweighting strong performing sectors and underweighting weaker ones has had limited success. Last year, for example, all nine S&P 500 industry sectors were down between 30% to 60%.
How can you know which sector ETFs are represent the best opportunity for capital growth? Which of the 300 industry focused ETFs are poised for the next leg up? Consider just one series of recent moves we made inside our Sector Savvy ETF Portfolio.
Just as stocks were bottoming, on March 2nd we got rid of short ETFs like ProShares UltraShort Real Estate (NYSEArca: SRS) and ProShares UltraShort Financial (NYSEArca: SKF). A few days later, on March 6th, the Dow Jones Industrial Average and S&P 500 bottomed.
And here’s what we stated to our subscribers on March 2nd: “In a contrarian move, we are establishing a long position in the ProShares Ultra Financials (NYSEArca: UYG). For the first time ever, UYG is trading below $2 per share compared to $72 in June 2007.” We subsequently bought UYG at $1.96 on March 2nd and sold half the position at $4.63 on May 8th. That works out to a 134% gain! Since the beginning of the year, the Sector Savvy ETF Portfolio is ahead 14.08% compared to a 4.08% rise in the S&P 500.
Getting the right mix of ETFs inside your portfolio doesn’t happen by accident. Despite the unpredictable nature of stocks, with just a little guidance and research from the right sources you can achieve investment results that exceed your expectations. Four of our six subscription based ETF portfolios are outperforming the S&P 500 this year. This is ample proof that profitable results are possible even during difficult times.
*Performance through 6/5/09 market close