The Traders Journal

The Straightforward Secret To Outperforming The 11 Sector SPDR ETFs


There is no shortage of academic papers to validate the paramount importance of accurate sector analysis in producing market beating results. My own three decades of experience confirms this. Simply put, SECTORS MATTER! I was recently given the opportunity to attend a presentation by sector guru and strategist Denise Chisholm of Fidelity. I'm pleased to report that her presentation exceeded my expectations. The following is just some of the wisdom and insights she disclosed.

The present market is divided into 11 sectors that we're all familiar with — Technology (XLK), Utilities (XLU), Financials (XLF) and so on. What Denise Chisholm explained is that a number of these are too large and contain odd bedfellows (my words!). For example, Healthcare (XLV) contains both Big Pharma companies such as Johnson & Johnson (JNJ) and HMOs such as Unitedhealth Group (UNH). Similarly, she pointed out that Industrials (XLI) contain both Caterpillar (CAT) and Waste Management (WM). Both examples show how very different businesses are somewhat unnaturally clustered in the same sector. Herein lies the opportunity for us individual investors.

Over the past 12 months, the Healthcare sector (XLV) has produced a return of 17%. If, however, one is willing to unbundle Healthcare into, say, three sectors as represented by the Fidelity Select Sector Funds, we bump our returns by 72% for Pharmaceuticals (FPHAX), by 39% for Medical Technology & Devices (FSMEX), and by 31% for Biotechnology (FBIOX). I don't know about your portfolio, but I'm very receptive to that sort of outperformance.

This reality exists for many of the other eleven Sector SPDRs as well. And it is precisely why the Tensile Trading ChartPack has included these Fidelity No-Load Sector Funds for many years. Fidelity has wisely subdivided the eleven Sector SPDR ETF universe into a more representative group of 43 Sector Funds. In the ChartPack, Grayson and I take it one step further each quarter by updating the top ten stocks held by each of these 43 Sector Funds.

So, let's recap. The Healthcare Sector SPDR ETF (XLV) was up 17.1% for the past 12 months. The Fidelity Select Sector Pharmaceuticals Fund (FPHAX) was up 29.42%. Within that fund, one of its ten largest holdings — Zoetis (ZTS) — was up 59.6%. So each quarter, the ChartPack gets you there in just three mouse clicks! Put the probabilities to work for you and put profits in your pocket. 

For myself, the takeaway from Denise Chisholm's excellent presentation is that for those individual investors willing to unbundle the eleven SPDR Sector ETFs into more representative groups, the outperformance is significant. We can debate whether it should be 43 Sectors or something less, but it's clear that Sector Analysis matters big time. Your personal Sector Scoreboard needs to be part of your investment routines. You can formulate your own or just use the ChartLists in our ChartPack. Either way, you profit mightily from your additional focus on sectors because, as we know, the markets big money ebbs and flows amongst key sectors. Follow the money flows!

March 21: "Mastering The Stock Market At All Ages"

Next month, Grayson and I will be presenting in Los Angeles to the AAII about "Mastering The Stock Market At All Ages". In this special event, we're taking over for a full morning (9:00am - noon) with three mini presentations designed to bring young and older investors together into the same room. We'll share how we manage our money, how we invest both separately and together, and discuss the most important lessons that we've learned as a father-son investing team with over 45 years of combined experience.

For more information about the event or to register, CLICK HERE.

Gatis Roze
About the author: , MBA, CMT, is a veteran full-time stock market investor who has traded his own account since 1989 unburdened by the distraction of clients. He holds an MBA from the Stanford Graduate School of Business, is a past president of the Technical Securities Analysts Association (TSAA), and is a Chartered Market Technician (CMT). After several successful entrepreneurial business ventures, Gatis retired in his early 40s to focus on investing in the financial markets. With consistent success as a stock market trader, he began teaching investments at the post-college level in 2000 and continues to do so today. Learn More
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