CONSUMER DISRETIONARY SPDR IS YEAR'S STRONGEST SECTOR -- BUT IT MAY BE OVERSTATING SECTOR'S STRENGTH -- ITS EQUAL WEIGHTED ETF IS LAGGING THE XLY BY AN USUALLY WIDE GAP OF 11% -- OUTSIZED GAINS IN AMAZON AND NETFLIX MAY EXAGGERATING ITS 2018 PERFORMANCE
CONSUMER DISCRETIONARY SPDR IS YEAR'S STRONGEST SECTOR ... Chart 1 shows the Consumer Discretionary SPDR (XLY) trading near a new record. Its 2018 gain of 18% makes it the year's strongest sector. That puts the XLY ahead of technology (16%) and healthcare (12%) for the year. In yesterday's message, however, I suggested that the gains in the XLY were being somewhat distorted by the fact that Amazon.com, which is up 70% on the year, accounts for 25% of the XLY. As promised, I decided to take a closer look at that issue today. I did that by comparing the nine cap-weighted sector SPDRs to their equal-weighted versions. That reduces the impact of a handful of larger weighted stocks in each sector. The results were enlightening. What I discovered is that there wasn't much difference between the two in most cases. In eight of the sectors, none of the differences exceeded 2%. With one big exception. While the cap-weighted Consumer Discretionary SPDR (XLY) was gaining 18% this year, the S&P 500 Equal Weight Consumer Discretionary SPDR (RCD) was gaining only 7%. That spread of 11% between the two ETFs far exceeds that of any other sector. The red line in Chart 1 plots a ratio of the equal-weighted version of the sector (RCD) divided by the cap-weighted XLY; and shows an usually wide divergence between the two ETFs. That appears to support the idea that outsize gains in some larger stocks (especially Amazon and, to a lesser extent, Netflix) may be exaggerating the sector's strength.
(click to view a live version of this chart)
Chart 1
S&P 500 EQUAL WEIGHT CONSUMER DISCRETIONARY ETF IS TESTING JANUARY HIGH... Chart 2 shows the Invesco S&P 500 Equal Weight Consumer Discretionary ETF (RCD) in the process of testing its January high. That's a far cry from the XLY in Chart 1 which exceeded that high during June is currently trading 8% above it. Using the equal weighted ETFs for nine S&P market sectors also changes the top rankings for the year. That would make technology the year's strongest sector with a gain of 17%, and healthcare second with a gain of 11%. The equal weighted version of the consumer discretionary sector (RCD) lowers its 2018 ranking to fourth place (just behind utilities) with a gain of 7%. There are at least two ways of looking at the unusually wide divergence between the two ETF versions of the consumer discretionary sector. One is that the cap-weighted version (XLY) is exaggerating the sector's strength. The other is that the equal-weighted version (RCD) is understating its strength. The fact they're so far apart, however, suggests that the answer may lie somewhere in between the two.
