The Market's Measure
So, How YOU Doin’?

So, How YOU Doin’?

Checking in on early bear market ETFs.

Back in October, we toyed with the notion that, if the U.S. economy was headed into recession, sector rotators might do better by moving capital into best-of-class ETFs (“Recession –Testing Your Portfolio”). As of today, no recession has yet been declared but we’re certainly seeing a stock market top in our rear-view mirrors. A downslope in equities, as you can see in the graphic below, is a typical recession precursor.

 

 

At this stage, we ought to be seeing outperformance in consumer non-cyclical stocks (remember, we waved off health care as an early bear sector in our October 5 article).  So, how have staples held up in the past trimester?

Relatively well, it seems. Emphasis on relatively.

We surveyed a half dozen ETFs focused on the large-cap consumer staples sector in October and gave the nod to the Guggenheim Equal Weight Consumer Staples ETF (NYSE Arca: RHS) on the basis of its five-year Sharpe ratio.

RHS, like all the consumer staples ETFs, outperformed the broad market represented by the SPDR S&P 500 ETF (NYSE Arca: SPY) over the past four months. Half of those funds, however, lost money. They just lost less money than the market as a whole. So much for the word “relatively.”

The “glass half full” news is that three of the ETFs cranked out positive returns as the overall market sank. At the top was the Guggenheim RHS fund. RHS owns the same issues as second-best Consumer Staples Select Sector ETF (NYSE Arca: XLP), just in different proportions. Equal-weighted RHS carries a 2.7 percent slug of Proctor & Gamble (NYSE: PG) while XLP devotes 12.1 percent of its portfolio space to the stock. RHS gives smaller-cap issues greater expression while avoiding XLP’s inherent concentration risk.  The Vanguard Consumer Staples ETF (NYSE Arca: VDC), a broader-based cap-weighted portfolio, rounds out the positive return tier.

 

Consumer Staples ETFs

  Return (%) Volatility (%) Sharpe Ratio
Guggenheim RHS 3.6 17.2 0.23
State Street XLP 2.7 15.1 0.17
Vanguard VDC 1.6 14.8 0.10
First Trust FXG -1.7 15.7 -0.12
iShares IYK -1.9 15.5 -0.14
PowerShares PSL -4.0 16.9 -0.25
SPDR SPY -4.7 17.2 -0.28

Based on total returns from 5-Oct-15 through 5-Feb-16

 

And the losers? What’s gone wrong with them? Active or quasi-active management for a couple and a tilt toward mid-caps for another.

The upshot? Sector rotation is more than just hitting the right market segment. You also have to use the right vehicle.

 

Brad Zigler is REP./WealthManagement's Alternative Investments Editor. Previously, he was the head of marketing, research and education for the Pacific Exchange's (now NYSE Arca) option market and the iShares complex of exchange traded funds.

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