SAN DIEGO (ETFguide.com) - On any given day
exchange-traded funds (ETFs), such as the Energy SPDRs (Ticker: XLE) and the
Financials SPDRs (Ticker: XLF) have trading volume that routinely outnumbers
that of leading blue chip stocks. Whether it’s to hedge portfolio positions or
to get convenient tax-efficient market exposure to a specific industry sector –
it speaks to the fact that both individual and professional investors are on
board with using these investment products to manage their portfolios.
The Select
Sector SPDRs divide the S&P 500 into nine key industry sectors and investors can
overweight or underweight specific
sectors according to their financial goals. As of October 31st, 2007
the Sector SPDRs amassed just over $22 billion in assets.
Joining us
is Dan Dolan, Director of Wealth Management Strategies at the Select Sector
SPDRs to talk about it.
To date, the broader S&P 500
has recorded positive year-to-date (YTD) performance, what particular industry
sectors are doing well?
DD: As of the close of business on
11/5, the S&P 500 is +6.00% with a wide range of good and bad under the surface.
The Energy Sector continues to lead +28% YTD followed by Materials +21% and
Technology having a solid year +20%. Seven of the nine sectors have a positive
performance at or above the S&P 500. The broad index has been dragged down by
two sectors – Financials -15% and Consumer Discretionary -8%. The Financial
sector is the largest slice of the market representing approximately 19% of the
S&P 500. Technology, a former leader, is now second in market cap and closing
the gap quickly.
Mortgage REITs and
homebuilders have been hurt badly this year. The financials (Ticker: XLF)
resilience to that downtrend seems to have been broken. To what extent will the
financials performance be related to weakness in the homebuilders and REITs?
DD:
The Financial Sector SPDR is down 15% YTD. Homebuilders and REITs are playing a
part in this downtrend but only in a supporting role. The real story has been
the large banks and broker/dealers that dominate this index. Their exposure to
subprime and CDO liabilities is causing the pressure. Citigroup has lost the top
spot in this index, replaced by Bank of America, as the largest financial
company measured by market capitalization. Diversified financials, banks,
brokers and insurance companies control 80% of this market segment. REITs
represent approximately 6% and homebuilders are smaller.
After breaking the $700
share barrier recently, Google grabbed the headlines. What would be another way
to participate in the movement of Google without spending north of $600 for one
share?
DD: What do you do
with Google at $600+ per share? I don’t know many investors who are comfortable
with Google at this level but they still would like to own it. One alternative
to closing your eyes and executing a buy order is a diversified basket of
technology stocks with Google as a significant component. Most investors
remember 2001 and the pain single stock exposure caused portfolios, particularly
in the technology sector. The Technology Sector SPDR is composed of the 82 Tech
and Telecom companies in the S&P 500. The index is market cap weighted. Google
is already the 4th largest component with a weighting of almost 6%.
A position in XLK, trading around $28 per share, gives investors exposure to
Google and 81 other Tech & Telecom components of the S&P. It may be a more
conservative approach to investing in GOOG.
Health Care stocks (Ticker:
XLV) have been dragged down over the past few years by underperforming
pharmaceutical stocks. If we are indeed in a recession, and some believe we are,
health care could very well be a great defensive play.
DD: Pharmaceuticals have been flat
for the last 52 weeks with YTD performance of +3.00%. This industry is trying
but is having a difficult time turning performance around. If investors believe
the economy is slowing and earning for growth industries will be more difficult,
healthcare may be a place to look. It has always been viewed as a defensive
sector and should perform better in a slowing environment. The long term
question for healthcare, particularly pharmaceuticals, is new product
development. With very large market caps and huge revenues, can these companies
introduce enough new products to sustain growth? Blockbuster drugs are hard to
come by.
As the year winds down, what
type of tax saving or last minute investment tips should investors be looking
at?
DD:The
last few years have been good for most investors. This year is a bit mixed which
offers us the opportunity to review accounts, particularly taxable accounts, and
make year end adjustments. Investors should consult a tax advisor before
entering into tax-related strategies. Some of these trades can add significant
value to your portfolio.
