Alaric Securities celebrates at Nasdaq MarketSite
June 19, 2024 | Issue 67

SPY Investing: Mid-2024 Sector Performance Recap

Nikolay Stoykov
Managing Partner at Alaric Securities

When it comes to SPY investing, the SPY ETF is a cornerstone for many investors. This index fund aims to track the performance of the S&P 500 index, which includes about 500 of the largest publicly traded companies in the U.S. SPY holds a diversified portfolio of securities that closely match the key risk factors and characteristics of the full index.

As the first half of 2024 comes to an end, we decided it is time to revisit the 11 S&P 500 Sector ETFs. In this article, we will analyze what has worked well and what hasn’t.

Sector ETF Performance Overview

Let’s start by looking at how each sector ETF has performed and finding out the important trends and insights. We’ll use a detailed table to help explain.
  Name Description AUM in Bln Weight In S&P500 PE Earnings Growth PEG Ratio Div Yield 10 Yr Ann. Return YTD Return
  SPY   537 100% 22,48 14,99% 1,50 1,24% 12,55% 11,25%
1 XLK Technology 71,10 32,29% 31,17 16,00% 1,95 0,65% 20,29% 9,37%
2 XLF Financial 38,00 12,31% 15,54 12,99% 1,20 1,57% 10,77% 11,08%
3 XLV Health Care 39,50 11,86% 20,18 17,47% 1,16 1,51% 10,94% 5,74%
4 XLY Consumer Discretionary 19,10 9,85% 23,71 14,06% 1,69 0,75% 11,66% -1,42%
5 XLC Communications 18,50 9,31% 17,59 16,63% 1,06 0,79% N/A 14,86%
6 XLI Industrial 18,30 8,29% 21,53 13,78% 1,56 1,50% 10,66% 8,72%
7 XLP Consumer Staples 15,60 5,81% 20,54 7,92% 2,59 2,73% 8,39% 8,14%
8 XLE Energy 36,50 3,61% 12,22 5,52% 2,21 3,29% 3,75% 12,02%
9 XLB Material 5,50 2,21% 21,16 8,79% 2,41 1,90% 8,61% 7,35%
10 XLRE Real Estate 5,90 2,13% 35,81 5,57% 6,43 3,46% N/A -4,41%
11 XLU Utilities 14,10 2,32% 17,32 8,10% 2,14 3,10% 8,99% 15,69%

Before we get into the details, it’s essential to mention that all the information provided is sourced from – State Street Global Advisors.

SPY ETF Detailed Analysis

To kick off, let’s explore SPY. SPY has 537 Bln. USD under management. Its forward PE ratio is 22,48; the following 3-5 year earnings estimates are for 14,99% annual growth. Thus, the PEG ratio for the ETF (PE/Growth) is equal to 1,5. SPY’s 10-year average return has been 12,55%, and its YTD return is 11,25%.

Next is XLK, S&P500 Technology Sector, ETF. The weight of the technology sector in the S&P500 is 32,29%, and it is not surprising that XLK is the sector with the highest AUM out of all the 11 sector ETFs with 71,1 billion USD under management. Its forward PE ratio is 31,10, and the following 3-5 year earnings growth estimates are for 16% annual growth. Thus making its PEG ratio 1,95, which is higher than that of SPY.

In our opinion, the PEG ratio is not an ideal ranking ratio but a perfect starting point. In this particular case, ranking ETFs investment appeal, we think it is relevant – we are not looking to allocate money into the technology sector because SPY makes for much more compelling value.

We will not go over each of the eleven sectors; highlight some facts we deem essential.

1) Sector PEG Ratios Favor SPY, with Exceptions in XLF, XLV, and XLC

Currently, only XLF, XLV, and XLC have PEG ratios that are better than that of SPY. Despite their relative cheapness, those ETFs are not attracting excessively high inflows. We looked at the same ETFs in our 27/3/24 blog “What ETFs to invest In,” our opinion has not changed – XLV and XLF look appealing to us. Despite being the cheapest, we continue to look at them favorably, while XLC prefers to stay away as the sector has vastly different stocks and the ETF is relatively new; it does not have a 10-year history yet. Even though those 3 ETFs look cheaper on a valuation basis, we often prefer to take an even more cautious approach and invest in SPY exclusively rather than any individual Sector ETF. We do this as we deem SPY to provide an extra “margin of safety.”

2) XLU: Leading YTD Performer, Yet Showing Signs of Overvaluation

The best-performing Select Sector ETF is XLU, S&P500 Utility Sector ETF. It is up 15,69% in 2024, has a PEG ratio of 2,14 versus 1,50 for SPY, and has an average 10-year return of only 8,99%. Yes, we are selling our exposure in that sector and buying SPY.

Notably, the AUMs of XLU are much higher than expected from its weight in the S&P500. As our readers can see, the utility sector has a similar weight to the materials and real estate sector in the S&P500 index.

However, that ETF has nearly three times as many assets as the other ETFs (14,1Bln USD for XLU; 5,9Bln for XLRE; 5,5Bln USD for XLB). Reasons vary, but one of the biggest is that retailers, for their high dividend yield, favor XLU.

While dividend yield may still look attractive, we think that given the relatively high interest rate in the US and the prospect of a slow pace of rate cuts by the Fed, the sector’s valuations are not low enough for us to enter. We certainly do not expect the XLU to continue to outperform SPY.

3) XLE, Too Much Money Invested in Energy?

We will start with the valuation of XLE. It is best described with one word – non-compelling. Moreover, the 10-year average return of the ETF is only 3,75% – the worst showing among the sector ETFs in that category.  Conversely, the YTD return is quite appealing, at 12,02% vs. 11,25% for SPY.

The reason for the excellent performance of XLE in 2024 is the slow pace of electric vehicle sales. Over 50% of global oil consumption can be tracked to cars, buses, and trucks. At the beginning of 2024, analysts’ expectations for growth in the sector were negative, and now they have turned positive, hence the surprise outperformance. It is important to note that while expectations are now more optimistic, they are still three times lower than the expectation for growth for SPY ETF. The world is going electric; it is just a matter of time, not if. We think that risks in the sector far outweigh the potential benefits, and while valuations are low, they are not low enough for us.

Investor Insights

Finally, we will note that XLE has a much higher AUM than its weight in the S&P500. As with XLU, the primary reason is that the sector is popular with retailers for its high dividend yield. While the XLU dividend appears safe to us, and we are only concerned with price appreciation, we are very concerned about the safety of the dividend yield in XLE. That interpretation may appear extreme to some of you, but we want to point out that XLE has the worst 10-year performance, including dividends, out of all S&P500 sectors.

Benjamin Graham’s value investing or buying “cigarette butts” stocks, as propagated by the famous investor, does not work and has not been working for a while. Buying “cigarette butt” stocks is a value trap, not value investing. A version of value investing, propagated by Warren Buffett, “buying good companies at fair prices,” is what has worked and will most likely continue to work. XLE is the “cigarette butt” sector ETF of the S&P500 Sector ETFs, as evidenced by its 10-year return.

Key Takeaway

In conclusion, we will say that, in our opinion, SPY continues to look like one of the best investment vehicles in 2024. Yes, a few sectors in the S&P500 look more attractive, like XLV and XLF, but we still prefer the margin of safety of the first ETF in the world – SPY. Also, we caution our clients against being exposed to energy stocks, especially oil stocks. The world is going electric. That transition will be long and uneven, but nevertheless, it will happen. Just like the world went mobile in the early 2000s, the world will go electric in the 2020s. Many legacy oil stocks are held by investors looking for high dividend yields, but those yields are unsafe. Your old landline telephone and answering machine have little value nowadays; something similar may happen to many oil companies.


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