What is the stock market’s mood? Indicators like the advance/decline ratio, CBOE Volatility Index (VIX) and the 200-day moving average give us a glimpse of the broader market’s trend. But examining the performance of key sector ETFs provides another meaningful perspective.
Let’s examine a few key sector ETFs and see what it says about the current sentiment of the overall stock market.
Consumer Sectors
Both consumer sectors within the S&P 500— the Consumer Discretionary Select Sector SPDR ETF (XLY) and the Consumer Staples Select Sector SPDR ETF (XLP)—are performing strongly this year. XLY has gained 25% while XLP is up 22.3%. Staples are the more defensive sector because they hold companies involved with food, household products and personal products. XLY is more reliant on the strength of consumer spending on non-necessary items and includes automakers, hotels and restaurants. The simultaneous performance strength of both consumer sectors is a clear signal that trends in our consumer-driven economy remain positive. Any proverbial chinks in the armor will likely be first seen in XLY.
Gold Miners
The VanEck Vectors Gold Miners ETF (GDX) has been on a tear in 2019, jumping 31.5% year-to-date. Supporting this move has been the resurgence in gold prices. The rise in miners is hinged on the performance of metals. And if the fear of falling stocks keeps gold—and silver—demand up, miners should be one of the few places of strength within the stock market.
Materials
The Materials Select Sector SPDR ETF (XLB) represents just 2.67% of the S&P 500’s weighting, making it the tiniest industry group within the index. The materials sector is associated with the development and processing of commodities, and holdings within XLB include companies that produce chemicals, construction materials, metals and paper products. XLB has gained 13.9% year-to-date. Meanwhile, the broadly diversified WisdomTree Continuous Commodity Index Fund (GCC), which uses futures contracts to track an equal-weight index of 17 physical commodities, has slid 1.8%. This odd decoupling of performance between XLB and physical commodities began in 2012 and has persisted. How much longer this discrepancy will continue is anybody’s guess, but it’s an anomaly worth watching. If XLB starts to sink, it could be an early warning sign that economic deceleration is gaining momentum.
Real Estate
Real estate got clobbered during the 2008-09 financial crisis. But since then the SPDR Dow Jones REIT ETF (RWR) has delivered a steady average annual return of 12.9% during the past 10 years, according to Morningstar. Declining U.S. interest rates has depressed bond yields and lowered borrowing costs for REITs, which have been a haven for yield-seeking investors. On a relative basis, RWR’s current 12-month yield of 3.55% looks a lot better than the 1.63% yield for 10-year U.S. Treasury bonds.