Sector Rotation

Sector Rotation

conceptual 3d rendered image of arrowMr. Market is often fickle in the short term. I have already complained about the roller coaster rhythms of 2014 leading many (including me) to be too cautious, as it turned out. Last weekend, a Kansas RIA colleague and I were consoling each other about being judged by the exact point at which the S&P 500 ends each year.

That stock index made more than a few worrisome drops but managed to end well. In fact, from the low on October 15th to the end of December, it gained over 10 percent. That plus dividends was nearly all of its gain for the entire twelve months.

Is there a solution that gains most of the upside potential of stocks in general, yet reduces the market volatility and probability of the worst losses? Rotation of sectors based upon their trends is the right method, in my opinion.

For example, using the iShares Dow Jones US sector ETF’s (Exchange Traded Funds) for reference, let’s look at 2014. The best performers were Transportation (symbol IYT) at 24, Healthcare (IYH) at 23, Utilities (IDU) at 23, Real Estate (IYR) at 21, and Technology (IYW) at 18 percentages respectively. The worst was the Energy Sector Index at minus 11 percent, 35 percent less than the best.

What is in store for 2015? Last week I expressed my amazement at the perfect record for gains in the first six months in the third year of presidential terms since 1943. However through yesterday the 20th, we have an unpromising beginning for the year. The S&P 500 has fallen almost 2 percent instead of having its more typical rally continuing from December, over 3 if you count from the high on December 29.

That same IYR, Real Estate Index, is bucking the downtrend and has risen over 5 percent, IYH, the Healthcare Index, by 3 percent, and IDU, Utilities Sector, has gained over 3 percent. So we have the potential for better returns by 5 to 7 percentage points. This is an extremely small slice of time, but the strongest sectors will either gain more or lose the least when compared to declining stock indexes. Although not sectors, US high quality bonds and the US Dollar are continuing to show their strength by gains.

The new kid on the block is the sector of Precious Metals, at least in Gold and Silver. Year to date, IAU, the iShares COMEX Gold Trust ETF is higher by over 9 percent and SLV, the iShares Silver Trust ETF has erupted to a 14 percent gain. From these and a few other commodities, that group may be coming back from the dead.

There are a number of investment companies that offer these sector vehicles in addition to the more typical broad-based mutual funds. BlackRock sponsors the iShares, the so-called Spiders belong to State Street Global Advisors, and Vanguard has its versions, among many others. I am not recommending any sponsor or mutual fund company over another, but the principles involved will work with any of them as well as regular sector mutual funds.

(Past performance is no guarantee of future results. Advice is intended to be general in nature. Statistics provided by Worden Brothers, Inc., TC2000, 2015.)