These Three Sector ETFs Are the Hottest Hands in July

“Sell in May and go away…”

Nine out of ten investors have likely heard this play on words turned investment advice, and four out of five Dentists agree.

That last part was a joke, of course.

As with everything in the market, it’s just not that simple.

Stocks and the stock market are a momentum machine and its always best to go with the flow of cash that is moving in or out of the market.

For instance, This May, that month that they tell us to sell in, rallied 4.8%.  That’s more than twice the average for May over the last 20 years.

June, yeah, it was supposed to be a loser too.  Over the last 20 years, the month of June averages losses of -0.4%, making it one of the worst months of the year to hold stocks.

Looking at the seasonality calendar, the month of July is one that you don’t want to miss.

I talked about the broad market’s tendency to outperform in July in a recent article that you can find here.  July ETF Seasonality

But today I want to lower the microscope with you.  Go from looking at the market from 10,000 feet down to looking at it from 5,000 feet.

Today, let’s look at the sectors that historically have a hot hand in the month of July.

I put together the following table to display the Using the last 20 years of returns for the month of July for 25 different sector exchange-traded funds (ETFs).

Everything from semiconductors to transportation to real estate and dividend yielders, all tested for their average performance and consistency (percent win) for the month of July.

Here’s the data and the Three best ETF’s to hold in July.

Looking at all 25 sectors, there are a few standouts from the perspective of winners and losers.

Average performance for the S&P 500 is 2.6% for the month, so we’ll use that as a “baseline”.

Here are the three hottest hands in July…

#1 Technology Select Sector SPDR Fund

This has been one of the hottest sector ETFs in the market for more than a year.  Over the last year, the Technology Select Sector SPDR Fund (XLK) has returned more than 30% - 20% better than the S&P 500 -  as artificial intelligence continues to pump up the market cap of the technology sector.

The top five holdings are a who’s who of the AI world, explaining this highflyer’s performance.  Here are those companies and their weighting.

  • Microsoft Corporation: 22.50% weight
  • NVIDIA Corporation: 20.26% weight
  • Apple Inc.: 4.58% weight
  • Broadcom Inc.: 4.24% weight
  • Advanced Micro Devices: 58% weight

The Technology Sector SPDR ETF racked up gains of 4.4% in June, much better than the average performance over the last 20 years of just 0.4%.  Added note, the ETF only posts positive results for the month of June (wins) 40% of the time.  So last month was a banner month.

This indicates what we know, the technology sector is hot, and we’re likely to see this July continue June’s strong performance.

One reason for the expected strong performance is the upcoming earnings season.

Large cap technology names will kick off their earnings parade in the last two weeks of the month.  Historically, we see a lot of investors “buy the news” ahead of this event.

Watch for the “buy the news” trade to bolster returns towards the end of the month in the Technology sector.

One warning: August is one of the most volatile and negative months of the year, especially for the Technology sector as the Buy the Rumor trade turns to Sell the News.

We’ll talk about that more as the month progresses.

XLK Price Chart

#2 iShares US Real Estate ETF

This will be a shock for most of you.

The second-best performing sector in July for the last 20 years is the Real Estate sector/ETF (IYR).

Keep in mind that this ETF is not made of homebuilders that may normally be posting positive sales and earnings in July because of a strong home market in the spring.

No, this sector is made-up of Real Estate Investment trusts that manage portfolios of everything from shopping centers to office buildings, health care facilities and yes, housing.

Here are the top five holdings from the iShares US Real Estate ETF:

  • Prologis: 8.34% weight
  • American Tower: 7.38% weight
  • Equinix Holding Weight: 5.77% weight
  • Welltower Holding Weight: 4.50% weight
  • Simon Property Group: 4.13% weight

This sector has been in a tight spot for the last year as analysts and investors have been calling for a crash in the real estate market.

The calls for a crash have been more focused on the commercial real estate market, but we’re now hearing more about the residential market.

That fear from investors has caused the iShares US Real Estate ETF to lag the market with returns of only 4% over the last year.

But check this out.

Last July we saw investor fear of a regional bank crisis and commercial market meltdown hit a peak.

It had been three short months since the failure of three major regional banks and investors were waiting for the other shoe to drop.

Despite that fear, the iShares US Real Estate ETF posted a strong July 2023 performance of 6%.

Historically, the iShares US Real Estate ETF posts average returns in July of 2.9%, 85% of the time.

The iShares US Real Estate ETF 50-day moving average just shifted into a bullish trend, meaning that the trend is now “friendly” for this real estate ETF in July.

IYR Price Chart

 

#3 Consumer Discretionary Select Sector SPDR Fund

If I had to choose one fund that I thought would underperform this July, the Consumer Discretionary ETF (XLY) is the one.

Consumers are stretched!

We hear it everywhere.  Analysts, the media, even from me.

Inflation and the high prices that it has left behind are cutting into our discretionary spending.

Companies like Winnebago (WGO), Thor Industries (THO) and the homebuilders are turning in sub-par performances this year.  The reason, we’re tightening our spending.

But look at the top five consumer discretionary stocks:

  • Amazon.com, Inc. 23.72% weight
  • Tesla, Inc. 13.64% weight
  • The Home Depot, Inc. 9.22% weight
  • McDonald's Corporation 4.09% weight
  • Booking Holdings Inc. 3.74% weight

Three of the five have defied tighter spending budgets as Amazon (AMZN), Tesla (TSLA), and Booking Holdings (BKNG) are performing well in the group.

On average, the Consumer Discretionary Select Sector SPDR Fund returns 3.0% in the month of July, posting gains 75% of the time over the last 20 years.

Last month, the sector rallied 5.8%, adding to the momentum that started in May.  So, the consumer discretionary sector is on a streak right now.

Here’s the key.

Watch Amazon and Tesla closely.  These two companies account for almost 40% of the sector’s performance and they have been on a tear!

Tesla is in the middle of one of its most powerful rallies in more than a year, adding to the Consumer Discretionary Select Sector SPDR Fund potential for July’s returns to outpace the averages.

XLy Price Chart

As I always ask, how do you trade this information?

First, if you already hold these ETFs, congratulations.  We’re early in the month, but earnings and any hint of slowing inflation and interest rate relief from the Fed will send each of these sectors higher than their 20-year averages.

If you’re an active trader, consider adding these ETFs to a targeted portfolio with a plan to reassess their returns for a rebalance at the end of the month.

Options trades may consider leveraging these moves with the use of long-dated (three month) at-the-money options.

One last thing.

July’s calendar turns to August, one of the worst months for performance of the year.

We’ll get into the details on that later in July, but now is not the time to fall in love with stocks.  Volatility is on the horizon.