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SPDR® SSGA US Sector Rotation ETF – Q4 2020 Commentary
XLSR finished in positive territory for the fourth quarter of 2020 as the fund returned 10.94%, but underperformed the S&P 500 Index. The fund finished the quarter with overweight positions in Consumer Staples, Materials, Communication Services and Consumer Discretionary.
Performance
Sector selection detracted from relative performance as negative contributions from Consumer Staples, Materials, Technology and Consumer Discretionary offset positive effects from Industrials, Energy and Communication Services. Consumer Staples appeared attractive across most factors evaluated and was held throughout the quarter. The sector finished higher, but trailed the S&P 500 and dented relative returns. Valuation and broad macro scores for Technology deteriorated in November, leading us to rotate out of the sector in December, which contributed to negative relative performance. Improving momentum and sentiment data led to a rotation into Communication Services in November, which proved beneficial. Vaccine-induced optimism and still-strong manufacturing PMIs benefited industrials as the ongoing reflation trade lifted the sector, which was a top performer and aided performance.
Portfolio Positioning and Outlook
From a regional standpoint, we continue to tilt in favor of US stocks. US equities are likely to shift gears as we move through 2021, focusing at times on the beneficial effects of additional government spending while paying more attention to the manner in which the government intends to raise the required revenue as policy proposals come forth. Notwithstanding this likely back-and-forth, US equities compare favorably to other regions across all factors we evaluate, with the exception of value.
Across equity sectors our bullish view is less pronounced. Our top-ranking sector from a modeling perspective is Consumer Staples — not exactly what one might expect to anchor an equity sleeve inside of a portfolio with a sizable risk overweight. But the sector continues to display strong sentiment in both earnings and sales expectations alongside reasonable relative valuations.
Elsewhere, we prefer higher beta sectors including Consumer Discretionary, Technology and Materials. The Consumer Discretionary sector received a new entrant when Tesla was added to the S&P 500 Index late in 2020, a development that might create some excitement for momentum-oriented investors, and anxiety for those accustomed to basing investment decisions on valuations. In addition to solid momentum (and relatively pricey valuations) the sector overall is supported by strong earnings and sales revisions. Technology shares have looked more vulnerable since their early September sell-off and as vaccine optimism has allowed other parts of the market to recover. Yet tech shares have managed to hold their own, and PMI and inflation data suggest we are in a recovery phase of the market cycle — one in which technology is often a beneficiary.
Materials represents one of the more cyclical sectors in our preferred mix. After steadily underperforming the market for approximately two years up through the spring of 2020, the sector’s recent string of leadership looks like it may be durable, provided any headwinds to economic recovery are only temporary.
Market Regime Forecasts
The Market Regime Indicator (MRI) employs a quantitative framework and forward-looking market indicators, including equity- and currency-implied volatility, as well as credit spreads, to identify the current market risk environment. Tracking risk appetite shifts in the market cycle helps frame tactical asset allocation and volatility targets.
S&P 500 Index
A popular benchmark for U.S. large-cap equities that includes 500 companies from leading industries and captures approximately 80% coverage of available market capitalization.
Real Estate Investment Trust (REIT)
Companies that own and operate commercial properties, such as office buildings and apartment complexes.
Overweight
The weighting of a given security, industry or market sector that exceeds the weighting assigned that security, industry or sector in a relevant benchmark or benchmark portfolio.
Underweight
The weighting of a given security, industry or market sector that is less than the weighting assigned that security, industry or sector in a relevant benchmark or benchmark portfolio.
This communication is not intended to be an investment recommendation or investment advice and should not be relied upon as such.
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