As we head into autumn, S&P 500 industry sector exchange-traded funds continue to reward bullish investors. Among the 11 S&P 500 sectors, eight have logged positive gains in 2023 (as of August 24) while just three are negative. Winners so far outnumber losers.
But it’s important to remember that equities’ impressive returns don’t predict their future movements. Nor are good returns necessarily a sign of a healthy economy. Nobel laureate economist Paul Samuelson once quipped, “Wall Street indexes predicted nine out of the past five recessions.”
Yet the U.S. stock market is undeniably humming along. Since the start of the year, the Vanguard S&P 500 ETF (VOO) has gained 15.75%. And the index’s success is directly tied to the dominant performance of three sectors: communication services, consumer discretionary businesses and information technology. Combined, these account for almost half of the S&P 500’s overall equity exposure. To say they influence the index’s results would be an understatement.
ETFs tied to these three groups have thus fared well, including the Communication Services Select Sector SPDR fund (XLC), the Consumer Discretionary Select Sector SPDR fund (XLY) and the Technology Select Sector SPDR fund (XLK), which have racked up impressive 2023 gains from 27% to 38%.
But when you look beyond those three, the performance of other sectors sags somewhat.
The middle tier of top performing sectors is led by the Industrial Select Sector SPDR fund (XLI), which has gained 9% this year, followed by the commodity-tied Materials Select Sector SPDR fund (XLB), which is ahead by 5%.
Stubbornly high inflation continues to rattle consumers. And it’s not just expensive groceries; housing inflation has skyrocketed as well. During the past four years, the price of homes worth at least $1 million or more has doubled, according to Redfin, a Seattle-based real estate broker. That lack of affordability, coupled with higher financing costs, has squeezed out would-be home buyers. Today, the average 30-year fixed-rate mortgage hovers near 7.25%, which is at two-decade highs.
So it’s not surprising that ETFs linked to industry groups like the Real Estate Select Sector SPDR Fund (XLRE) and SPDR S&P Homebuilders ETF (XHB) face major headwinds. Yet stock market investors don’t seem to care. The Homebuilders fund has soared more than 33% since the start of the year, while the real estate fund has a modest gain of 0.44%.
Even those industries at the bottom of the performance chart offer a silver lining for bulls: The losses have been modest.
The regional banking crisis that saw the collapse of three institutions earlier this year (Silicon Valley Bank, Silvergate Bank and Signature Bank) has had a muted impact on financials overall, including the Financial Select Sector SPDR fund (XLF). After posting a negative return earlier this year, the fund has now broken even.
Among poor performers, the Utilities Select Sector SPDR Fund (XLU) is the worst of the sector names and has lost almost 9% this year. The risk of natural disasters, the crash of Hawaiian Electric Industries and the fallout from Maui’s wildfires has spooked some investors into rethinking the safety of utilities. Nevertheless, a 9% decline for the utilities fund is hardly a raging bear argument.
All this means that doom-and-gloomers searching for bad news in the S&P 500 sectors will have to look elsewhere for now. Stock market bulls are still winning, at least for the moment.