Courtesy of Marketwatch/Benzinga.com
It seems like whenever the rally in the S&P 500 is discussed, at least when it is talked about in positive terms, it is associated with favorite Wall Street vernacular such as “risk on” and “animal spirits.”
With the SPDR S&P 500 SPY -0.39% up almost 41 percent in the past three years, including dividends paid, it is not illogical to think risk on has ruled the roost over that time.
A closer examination of sector ETFs paints a different picture. As was highlighted on Monday, the Consumer Discretionary Select Sector SPDR XLY -0.62% has been the standout of the nine sector SPDRs funds over the past three years. Thing about XLY is the ETF has a beta of one against the S&P 500 and annualized volatility of 16.88 percent.
Said another way, XLY is not the most volatile, nor is it the riskiest ETF out there. Simply put, this has been a risk off rally and it has been that way for three years. Returns accrued by sector ETFs prove as much.
High Beta Disappoints…Sort Of. Here is a trivia question: Excluding XLY, which is the only sector SPDR that is perceived as a high-beta play to outpace SPY over the past three years? Answer: The Energy Select Sector XLE -0.13% . XLE has topped SPY by 350 basis points over that time while being 660 basis points more volatile.
The 23.1 percent gain for the Materials Select Sector SPDR XLB -0.85% only look good in comparison to the 19.4 percent gain for the Financial Select Sector SPDR XLF -0.49% . Those ETFs have betas of 1.22 and 1.23, respectively, against the S&P 500.
Then there is the case of the Technology Select Sector SPDR XLK -0.59% , an ETF perhaps best known for having one of the largest weights to Apple AAPL -1.96% . XLK has a beta of 1.08 and annualized volatility of 16.16 percent, according to State Street data. Alright, so those number do not make XLK the most volatile ETF out there and it is up 36.1 percent in the past three years.
However, the SPDR options that have outperformed XLK, and XLB, XLE and XLF for that matter, might surprise those that are convinced this has been a risk on rally.
Low Beta Dominates Furthering the notion that investors have preferred sectors they perceive as less risky are the returns to the relevant SPDR ETFs over the past three years. Since March 23, 2010, the Consumer Staples Select Sector SPDR XLP -0.05% has surged 52.3 percent. The Health Care Select Sector SPDR XLE -0.13% is up 46 percent while the Utilities Select Sector SPDR is up 44.1 percent.
Here is an interesting and accurate way of looking at this rally: XLU has outperformed XLK by 800 basis points over the past three years while being 550 basis points less volatile. Moreover, investors have been paying up for the privilege of getting their hands on XLP’s 0.63 and XLU’s 0.47 betas. Both ETFs, XLU in particular, are richly valued on a historical basis.
Those that prefer riskier fare might be apt to say “Three years is a long time. Maybe the higher beta sectors have outperformed over narrower time horizons.” Well, over the past two years, SPY is up 25.1 percent. Of the four riskier sector SPDRs highlighted here, only XLK is reasonably close to that performance with a gain of 23.1 percent.
XLU tops SPY’s two-year run by nearly 700 basis points. Owning just XLP and XLV would have worked out even better. The average two-year returns to those ETFs is nearly 43.3 percent. Said another way, two ETFs that hold stocks such as Procter & Gamble PG +0.75% , PepsiCo PEP +0.09% , Pfizer PFE -0.43% and Merck MRK +0.15% have, when averaged together, nearly doubled the performance of XLK. XLK is home to Apple, Google GOOG +0.84% and sexier fare than P&G and Pfizer.