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S&P 500 Sector ETFs: A Look Under the Hood, Part 3

Charles Sizemore
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For Part 1, see S&P 500 Sector ETFs: A Look Under the Hood, Part 1
For Part 2, see S&P 500 Sector ETFs: A Look Under the Hood, Part 2

Financial Select Sector SPDR (XLF)

The worst-performing sector ETF of the past 10 years and since the 1998 inception of the Select Sector SPDRs is, of course, the Financial Select Sector SPDR (XLF). Over the past 10 years, it returned 0.14% per year. Since inception, it managed to eke out 2.6% per year.

Given that the worst financial crisis since 1907 centered around this sector, it’s remarkable that its returns are positive at all!

Interestingly — and indicative of how fall the global banking giants have fallen — the largest holding in this ETF isn’t a bank at all. It’s Warren Buffett’s conglomerate Berkshire Hathaway Inc. (BRK.B), which is considered an insurance company by Standard & Poor’s. Berkshire Hathaway makes up just shy of 9% of the portfolio.

Following quickly behind is one of Berkshire Hathaway’s largest long-term holdings, Wells Fargo & Co (WFC). And of course, following Wells Fargo are some of its less prudent competitors, JP Morgan Chase & Co. (JPM), Bank of America Corp (BAC) and Citigroup Inc (C). Most of the rest of the portfolio is made up of smaller banks, asset managers and brokerage houses.

For the time being, XLF also has a decent-sized exposure to REITs, at about 12% of the portfolio. This is absurd, as there is no practical reason why a shopping mall landlord like Simon Property Group Inc (SPG) should ever be in the same sector ETF as Goldman Sachs Group Inc(GS).

Luckily, this anomaly won’t be around for much longer. Standard & Poor’s is giving REITs their own standalone sector, and presumably the State Street Select Sector SPDR ETFs will follow suit. (The SPDR ETFs do deviate from time to time. For example, telecom and technology, which S&P breaks into two sectors, share a single SPDR ETF.)

Health Care Select Sector SPDR (XLV)

Next up is the Health Care Select Sector SPDR (XLV). The Health Care ETF has been one of the very best performers, generating annualized 28.1% returns over the past three years and 8.5% annualized returns since the inception of the SPDR series in 1998. 28.1% annualized returns are the stuff of 1990s dot-com memory, yet came from one of the S&P 500’s more conservative sectors.

Call it the Obamacare trade.

What you get with XLV is a who’s who list of big pharmaceutical companies like Johnson & Johnson (JNJ), Pfizer Inc. (PFE) and Merck & Co., Inc. (MRK). You also get exposure to the bigger and more established biotech names, like Gilead Sciences, Inc.(GILD) and Amgen, Inc. (AMGN), and to health insurance companies.

What you are distinctly not getting is a good dividend payer. The days when the health sector was considered a high-yield sector are over. XLV is one of the lowest-yielding sector funds with a dividend yield of just 1.3%.

Industrials Select Sector SPDR (XLI)

Next we get to the Industrials Select Sector SPDR (XLI). Despite being considered a cyclical sector, the industrials have managed to put up consistent and respectable returns over the life of the SPDR series. Over the past three-, five- and 10-year periods, XLI generated returns of 18%, 17.1% and 7.8%, respectively.

The holdings here are going to include household names like General Electric Company(GE) — a company that is thankfully getting back to its industrial roots and leaving its experimentation as a bank in the past.

3M Co (MMM), Boeing Co (BA) and Lockheed Martin Corporation (LMT) also make the top 10, as you might expect. But XLI also has quite a few stocks that you might not think of as “industrials,” per se, including airlines like Delta Air Lines, Inc. (DAL) and parcel companies like United Parcel Service, Inc. (UPS).

And somewhat bizarrely, white-collar headhunting firm Robert Half International (RHI) makes the list as well.

Don’t expect much in the way of dividends with this ETF. At 1.8%, its yield is about in line with the broader S&P 500.

To continue to Part 4: S&P 500 Sector ETFs: A Look Under the Hood, Part 4

Charles Lewis Sizemore, CFA, is the chief investment officer of investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. 

This article first appeared on Sizemore Insights as S&P 500 Sector ETFs: A Look Under the Hood, Part 3

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