We are at the mid-year mark for 2015. That’s an opportune time to look into the rear view mirror, as well as reflect on what might be on the road ahead. The best way to capture the forward-looking view on stocks is to look at the best and worst sectors in the first half of the year.
The best sectors through Q2 could be great momentum plays for the remainder of 2015. Or, now could be a good time to sell shares to lock in gains.
Equal and opposite, the worst sectors of the year can provide clues about weakness going forward or there could be some good value plays in oversold sectors.
And in total, looking at both the best and worst sectors through Q2 2015 can indicate where the market “thinks” the business cycle is now and where the economy may be headed in the months ahead.
The 3 Best Sectors Through Q2 2015
Based upon performance of sector funds and ETFs from the beginning of the year and up to the last few days of the quarter, here are the three best sectors through Q2 2015:
- Biotechnology: Actually a sub-sector of the health sector, biotech stocks have led the market for the greater part of 2015. One of the top performers in the health sector was SPDR S&P Biotech (XBI), which jumped more than 30% in price. Biotech could be a momentum play but it could also be ripe for a correction in the short term. Investors are wise to consider selling off shares to lock in gains now. For a long-term play, buying a mutual fund like Vanguard Health Care (VGHCX) or an ETF like Health Care Select Sector SPDR (XLV) that is diversified among the entire sector can also be a wise move now.
- Technology: Growth stocks are leaders going into the final phase of the business cycle and the technology sector is leading the way in 2015. Well-managed mutual funds like Fidelity Select IT Services (FBSOX) were up 13% or more through Q2 2015. The social media sub-sector was a standout. ETFs like Global X Social Media (SOCL) jumped more than 15% in price by mid-year. The tech sector looks to keep its momentum through this last leg of the bull market, which could go beyond 2015 or even 2016.
- Consumer Discretionary: Lower prices at the gas pump, more jobs, higher wages and a six-year-old bull market for stocks make for happy consumers . . . and happy consumers spend more on products and services that are considered discretionary or luxury, such as hotels, amusement parks and home-improvement stores. As measured by a jump in price of more than 8% at mid-year for Consumer Discretionary Select Sector SPDR (XLY), the consumer discretionary sector is our third sector leader. The positive economic backdrop is not likely to fade anytime soon. Therefore this sector could continue as a leader throughout 2015.
The 3 Worst Sectors Through Q2 2015
Now that we know the top sectors through mid-year, let’s take a look at the worst of them.
- Natural Resources: As whole, this sector was dragged down in the first half of 2015 by miners in the coal and precious metals industry. The weakness in oil also hurt the natural resources sector. The funds that concentrate on U.S. mining got hit hardest, as evidenced by the 17% drop of the SPDR S&P Metals and Mining ETF (XME). This sector may have further to fall and investors looking for a value play may want to wait longer before buying shares of funds in the sector.
- Utilities: Stocks and funds in the utilities sector tend to do best in low and falling interest rate environments, when investors are seeking income from securities other than bonds. Utilities were top performers in 2014 but the story is quite different in 2015, as evidenced by the 10% price decline for Utilities Sector SPDR (XLU) at the end of June. Investors should expect more downward pressure in the short term for utilities but prices could be near a bottom if expectations on rate hikes are already priced in to utilities stocks. Long-term investors, especially those looking to get defensive ahead of the next big correction, may consider picking up shares of utilities sector funds as a value play.
- Real Estate: Similar to the fate of utilities stocks, funds investing in real estate investment trusts (REITs) saw price declines in the first half of 2015 because investors are rotating out of income-producing stocks as they look to a Fed rate hike before year’s end. iShares Cohen & Steers REIT (ICF) was sitting on a 5% decline in price at the end of June. For broader diversification, investors may consider buying into a sector, such as Financials, that can potentially do well in a rising interest rate environment.
Bottom Line: Sector funds can be a smart way of adding diversity to a portfolio while potentially enhancing returns over time. But their concentrated exposure to small segments of the market can, in isolation, have excessive market risk. They may be best used as satellite holdings, which might mean an allocation of roughly 5% of the total portfolio. Investors may also consider using two or three different sectors for added diversity.
As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities. However he holds XLE and XLU in some client accounts. Under no circumstances does this information represent a recommendation to buy or sell securities.
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