XLU Utilities Select Sector

After recording a short pullback, the S&P 500 once again returned to growth thereby recording multiple sessions of gains and closing at multi-year highs.  This recent rise in the benchmark index was mostly led by encouraging data on home prices and rising consumer confidence (2 Popular ETFs to Avoid in May).

The technology sector has also added to the positive momentum in the index, as Apple takes the initiative for the largest non-bank bond sale in history while it also looks to return cash to shareholders as well. On the earnings front, events have turned around in the past few days, with more companies beating and the earnings season turning out a little better overall.

The strong momentum of the S&P 500 since the start of the year surely indicates that the bull is back in the market. A number of market sectors have performed remarkably well in the year-to-date period, riding on market optimism.

In fact, equities may continue to experience a huge amount of inflows as the Fed is expected to continue with its bond buying policy to stimulate the economy and keep the interest rates low.

Investors should note that with the U.S. market at all time highs, it is the defensive sectors of the economy which are leading the market. All the three defensive sectors – healthcare, consumer staples and utilities – have recorded strong year-to-date gains beating the broader market index (3 Sector ETFs Surviving This Slump).

Defensive sector stocks generally deliver strong returns when investors perceive that the markets are in trouble. But 2013 seems to have changed the trend with defensive stocks leading the market. This may be due to their ability to return cash to shareholders when bonds have turned expensive. With this backdrop, let’s take a look at each of the sectors in a little greater detail below:

Consumer Staples

The companies under the consumer staples sector sell relatively low-margin products that consumers use frequently in their daily lives, including food, beverages and products for personal hygiene or household cleaning (Can the Consumer Staples ETF Go Higher).

The purchase of these necessities is generally stable over time, irrespective of the spending patterns or whether the economy is expanding or contracting.

The consumer staples sector is outperforming the broader market index. It has been a favorite pick for investors as evidenced by the recent run-up in the sector’s stocks. The strong fundamentals for the sector are also showing up in positive earnings momentum.

Some of the companies in the sector have been able to deliver impressive results and have the potential to grow in the upcoming quarters as well, especially if emerging markets get back on track.

With that being said, one way to tap the positive momentum in the sector is through basket form. In this context, Consumer Staples Select Sector SPDR Fund (XLP) represents a good investment opportunity.

The Consumer Staples Select Sector SPDR Fund is the oldest product in the space with a high liquidity level which provides exposure to the consumer sector at the lowest cost. The ETF seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the S&P Consumer Staples Select Sector Index.

The fund has delivered a very strong performance in the year-to-date period and has outperformed the broader market index as well. The fund’s year-to-date returns stand at 15.2% (Weak PG Earnings Drag Down Consumer ETFs).

The product appears to be liquid as more than seven million shares change hands on a daily basis. The fund invests its $7.2 billion assets in a small basket of 44 stocks.

The fund appears to be quite concentrated in the top 10 holdings as 64.8% of the asset base goes towards these 10. In fact, the top three holdings have a share of 33.63% in the fund.

Food & staples retailing gets the first preference in terms of sector allocation. For this exposure, the investor pays an expense ratio of 18 basis points, one of the lowest in the space. XLP provides a yield of 2.63%.

Utilities

Utilities is another sector which has put up a very strong performance in 2013. The rise in population has led to an increasing demand for essential utility supplies.

Here utility companies step in with their ability to generate essential supplies in large volumes and cater steadily to the needs of their customers. The utility companies generally comprise of electric, gas, water and integrated service providers (So Much for Safety: Utility ETFs in Bear Territory).

As per the most recent U.S. Energy Information Administration (EIA) report, global energy use will increase to 770 quadrillion British thermal units (Btu) in 2035 from 505 quadrillion Btu in 2008. The projected increase in the global demand for power will also necessitate massive investment in the utilities over the next couple of decades.

In the light of the above statement, investors should consider investing in Utilities Select Sector SPDR (XLU). XLU has been a strong performer in the year-to-date period delivering a return of 11.4%.

Launched in late 1998, XLU seeks to match the price and yield performance of the Utilities Select Sector Index before fees and expenses. The fund holds 33 securities in all and has net assets of $6.5 billion.

The ETF is appropriate for those investors who are looking for a targeted bet on regulated utilities, as well as independent producers and traders of power. XLU is by far the biggest as well as the most liquid ETF targeting this space, as indicated by its average daily volume of about 7.5 million shares.

Additionally, the fund targets the large cap space of the sector, focusing its assets on the biggest companies. Partly due to this, the ETF is slightly concentrated in its top 10 holdings with 57.6% going to these stocks, a still reasonable level considering that it holds 33 securities in total.

XLU pays out a good yield of 2.71% per annum and charges investors a paltry 18 basis points in fees and expenses (3 Sector ETFs with Solid Yields).

Healthcare

The U.S. healthcare sector is one of the potential bright spots as the country is one of the major markets for healthcare and one of the largest spenders on public health, putting the sector in an advantageous position.

The sector has been in focus despite profitability remaining under pressure for many companies, and some policy uncertainty with regards to the Affordable Care Act and its implementation over the next year months.

The segment is expected to remain in growth territory in 2013, given the aging population and higher rates of chronic diseases, growing demand in emerging markets and new product launches as well.

In such a scenario, Healthcare Select Sector SPDR (XLV) can be an interesting option to play the U.S. healthcare sector. The sector has performed relatively well year to date delivering a return of 19.5% (Healthcare ETF in Focus on Earnings Reports).

XLV boasts an impressive $7.9 billion in assets under management and distributes this asset base among 56 holdings. However, the allocation entails heavy concentration in the top ten holdings with a share of 57.93%.

Its top holdings include well-known bellwethers like Johnson & Johnson, Pfizer and Merck. In fact the top three holdings get one third of the asset allocation thereby playing a dominant role in the performance of the ETF.

The ETF represents a varied group of stocks that belong to pharmaceutical (48.19%), healthcare equipment and supplies (17.64%), healthcare providers & services (16.12%) and biotechnology (13.52%). The fund charges a fee of 18 basis points.

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SPDR-SP 500 TR (SPY): ETF Research Reports
 
SPDR-UTIL SELS (XLU): ETF Research Reports
 
SPDR-HLTH CR (XLV): ETF Research Reports
 
SPDR-CONS DISCR (XLY): ETF Research Reports
 
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