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Sector ETFs: Strength In Avoiding New Government Intervention

08 September 2010 at 3:47 pm by Gary Gordon     Bookmark and Share    Follow EtfExpert on Twitter

InTrade.com currently predicts a 70% chance that Republicans will control the House Of Representatives after the 2010 elections. The site’s prediction market platform has¬†Republican chances of claiming the Senate at approximately 28%.

Indeed, many expect¬†big changes after the mid-terms.¬†In fact, there’s a growing sense of giddiness about how high the markets might¬†climb… particularly, if the entire make-up of Congress shifts.

I, on the other hand, am not so sure. The broader market has¬†already rallied on the notion that we’ll see two years of intense gridlock; the fact that pro-business Republicans will make inroads is widely anticipated already. It follows that the markets may sell off on anything less than a brand new¬†“House.” And, additional¬†November/December gains may require the longer shot of a complete¬†takeover in the Senate.

Right now,¬†however, there’s specific sector weakness in the exact areas where¬†government has intervened¬†the most. According to ETFScreen.com,¬†the Sector ETFs with the lowest relative strength percentile rankings are Financials (XLF), Health Care (XLV) and Energy (XLE).

Perhaps¬†investors perceive that¬†the next Congress won’t/won’t be able to¬†“roll back” universal health care, FIN REG and fines/fees/regulations in the energy space. Or perhaps investors still fear Democratic control of the two houses such that…¬†more¬†intervention is yet to come.

Sector ETFs: Relative Strength Rankings (RSf) on 9/8/10 Across ETF Universe
Industrials Select Sector SPDR (XLI)   78.7
Utilities Select Sector SPDR (XLU)   75.5
Consumer Discretion Select SPDR (XLY)   71.3
Materials Select Sector SPDR (XLB)   66.7
Consumer Staples Select SPDR (XLP)   52.6
Technology Select Sector SPDR (XLK)   30.4
Energy Select Sector SPDR (XLE)   26.7
Financials Select Sector SPDR (XLF)   20.9
Health Care Select Sector SPDR (XLV)   20.5
Data Provided By ETFscreen.com    


The 3 belaguered¬†sectors mentioned above haven’t just been adversely impacted by legislation… they’ve become progressively weaker over the last 3 months.¬†The uncertainty of the new laws, the uncertainty within the legislative documents themselves and the uncertainty of how the government will enforce the new laws is killing XLF, XLE and XLV. (Note: These sector ETFs effectively sit in the lowest quartile of ETF investment alternatives.)

In contrast, Utilities (XLU) are already highly regulated. The consistency of its 4%+ dividend income stream is particularly attractive relative to 10-year treasuries yielding 2.6%. XLU is trending higher, testing 52-week highs and is increasing in relative strength. Taken together, this stock ETF has secured a space in the highest quartile of ETF investment alternatives.

Similarly, in our current¬†jobless recovery,¬†credit conditions for businesses have improved, interest rates are¬†accommodative and¬†M&A has picked up dramatically.¬†Indeed,¬†the biggest conglomerates in the Industrials ETF (XLI) are¬†increasing¬†top-line¬†revenue¬†and bottom-line profits. Granted, no economic sector is immune from¬†a struggling¬†consumer or an incoveniently intervening government. Yet XLI¬†is demonstrating that it¬†may be able to thrive in an environment where the more gridlock… the better.

You can listen to the¬†ETF Expert Radio¬†Show¬†‚ÄúLIVE‚ÄĚ,¬†via podcast or on your iPod.¬†You can review more ETF Expert features here.

Disclosure Statement: ETF Expert¬†is a web log (‚ÄĚblog‚ÄĚ) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships. You may review additional ETF Expert disclosure details here.

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