What weighs more… a pound of feathers or a pound of gold?
You may remember this schoolyard trick riddle… The answer, of course, is that they weigh the same.
Or do they?
Actually, gold is traditionally measured using a different weight system – the troy ounce, which weighs 31.1 grams as opposed to 28.35 grams for the regular, or avoirdupois ounce. You would think that would make a pound of gold heavier – but it's not, since there are only 12 ounces in the troy pound. So that ultimately means a pound of feathers weighs more.
Pretty cool, huh?
I've been thinking about this old riddle lately as I watch money move in and out of different market sectors… creating, if you will, a "heavier pound" in one place or another. This phenomenon is called "sector rotation."
Sometimes – as with the heavier feather example – the bulk of the money lands in places you wouldn't expect.
In the past, I've described ETFs as "baskets of stuff" that trade like individual stocks. So looking at the top stock holdings that make up the "baskets" will help us understand why these ETFs trade like they do.
And when you know what's in these ETFs – and which ones are underperforming or outperforming – you'll be able to translate that knowledge directly to your portfolio…
Here Are the Sector ETFs to Watch… and What's in the Baskets
One of the intermediate-term indicators that I always keep an eye on is sector rotation.
This term – sector rotation – is just a shorthand way of saying which sectors are performing better at any given time.
I believe that we can understand some of the positioning patterns of investors and traders when we see where money is flowing.
And right now, the changes that are taking place give us a very good clue to market health. To get to that insight, let's look at the long-term and the short-term performance of the nine major S&P sector exchange-traded funds.
In the chart below, we see the performance of the nine ETFs relative to the S&P 500 for 2017. I'm showing this chart up through the 28th of November because that was the date that we started to see a swing in sector rotation:
Here we see that the tech sector far outperformed, the energy and consumer staples significantly underperformed, and all of the other sectors were within 4% of the S&P 500's returns. I'm guessing that outcome is not too surprising to anyone who has been keeping an eye on the markets this year.
But let's take the time to look at what is really in these sector ETFs, or "baskets."
For example, the tech ETF symbol XLK has the following top holdings:
I'm guessing most items on this list will not surprise you. That Apple, Microsoft, Facebook, and Alphabet make up 43.6% of the ETF is expected. However, knowing that payment networks like Visa and Mastercard and Internet service providers like AT&T and Verizon are included is fairly interesting.
The energy ETF with the symbol of XLE is equally uncomplicated in its holdings:
The big vertically integrated oil majors like Exxon, Chevron, and ConocoPhillips make up the bulk of the index. Oil services companies like Schlumberger and Halliburton and other less integrated companies round out the list.
The consumer staples list is, on the other hand, a little more interesting:
In the consumer staples area, product producers like Procter & Gamble (maker of Tide, Pampers, Crest toothpaste, etc.), Coca-Cola, and PepsiCo are prevalent, as are tobacco producers (Philip Morris and Altria). Then the big consumer goods retailers weigh in – Walmart, Costco, CVS, and Walgreens. With this group, it's easy to see that this sector deals with the stuff people buy every day. So it's less sexy during high-growth periods and more interesting to investors during market pullbacks. Which comes into play in our analysis below.
About the Author
Nationally recognized technical trader. Background in engineering, system designs, and risk reduction. 26 years in the markets.