SPDR Sector ETFs, issued by State Street Global Advisors, are the largest and most liquid Exchange-Traded Funds designed to track the overall market sectors of the U.S. economy. They are comprised of the 500 large-cap stocks in the S&P 500 index. They divide the index based on Sector classification, and are weighted based on the market cap of their constituent stocks.
“Sector rotation” refers to the tendency of market sectors to behave roughly in phase with the larger economic business cycle – Expansion, Contraction, Recession, or Recovery. For instance, as the Energy Sector remained weak in response to lower oil prices through the latter half of 2015, investors moved into the more conservative Utilities sector, driving it up in early 2016.
• Overview of Sector Rotation from Investopedia.
• Sector investing and the Business Cycle from Fidelity.
In addition to the Sector Performance View, Chaikin provides charts for Sector ETFs, with technical analytics including moving averages, trading bands, Chaikin Money Flow, Relative Strength, and Overbought/Oversold indicators, Relative Strength Buy/Sell Signals, and “Power Bars” which show the Bullish/Neutral/Bearish breakdown of Chaikin Power Gauge ratings for stocks in the Sector.
In 1999, Standard & Poor’s and MSCI Barra jointly developed the Global Industry Classification Standard (GICS®) to establish a global standard for categorizing companies into sectors and industries. It allowed for consistent designations of companies in different markets, using a four-level hierarchy: Sectors, ‘Industry Groups’, Industries, and Subindustries. There are 10 Sector classifications.
Standard & Poors created S&P 500 Sector Indexes based on the GICS Sector designations, which include the stocks in the large-cap S&P 500 Index for each of the 10 Sectors.
State Street Global Advisors, which had created the popular SPDR S&P 500 ETF (SPY), issued “SPDR Select Sector ETFs” — Exchange-Traded Funds which track the S&P Sector Indexes. These are by far the largest and most liquid Sector ETFs.
Though there are 10 Sector codes and Indexes, there are only 9 Sector ETFs. (There are not enough S&P stocks in the Telecommunications Sector to meet the minimum ETF listing requirements, so this Sector is folded into the Technology Sector ETF).
“Sectors” or “Sector codes” are a classification scheme. Indexes are created to track specific Sector codes – but you can’t invest directly in an index. For that, you need a fund.
“Sector ETFs” are funds you can invest in, which track Sector Indexes. They have certain requirements that Indexes don’t, and their constituents or weightings may reflect these differences.
The SPDR Sector ETFs were created to track the S&P Select Sector Indexes, which are based on the S&P/MSCI GICS classifications. There are 10 Sector codes and Indexes, but 9 ETFs which track them.
Yes, other companies offer Sector ETFs including Blackrock’s iShares, First Trust, and Vanguard.
These are accessible from the ETFs section of the List Navigator.
In 2014, S&P announced they would be breaking apart the Financial Sector classification into a Real Estate Sector and a Financial Services sector, to better reflect the growing and changing dynamics of the Real Estate investment industry, whose fundamentals are the least correlated with other groups in the Financials Sector. That designation goes into effect at the end of August 2016. In 2015, State Street issued the XLRE and XLFS Select Sector ETFs to track the new designations. These are mostly appropriate for money managers who follow a strict GICS discipline. The XLF SPDR Financial Sector ETF continues to be traded, and currently dwarfs the XLRE and XLFS in assets and trading volume. While this is the case, Chaikin will use the XLF in its Sector lists.
The 20 ‘Subsectors’ in Chaikin Analytics are the State Street ETFs which track Industry Groups. Most of them are benchmarked to one of the Standard & Poors Select Industry Indexes, which are comprised of groups of related Subindustries, They consist of around 1,000 stocks chosen from the S&P Total Market Index, which includes companies whose market cap is not large enough to qualify for the S&P 500, and are constructed using a modified equal weighting system.
In some cases, such as the Technology Subsectors, State Street uses a provider other than Standard & Poors for its benchmark indexes.
The terminology around “Industries” can get a bit confusing. Here’s the rundown:
- S&P/MSCI in their GICS classifications uses the following 4 levels: Sector/ Industry Group/ Industry/ Subindustry
- However, the term “Industry Group” is not often maintained by other information providers, and the term “Industry” has various, similar meanings across providers.
- Chaikin Analytics has used the terms “Industry Group” and “Industry” interchangeably since our inception, and we use “Industry” to refer to the Zacks Industries we display in the application. These are also based on GICS classifications, but with modifications specific to Zacks. State Street calls their ‘Subsector’ level ETFs, “SPDR Industry ETFs”.
- For these reasons, we use the term “Subsectors” to refer specifically to State Street’s ‘subsector level’ SPDR ETF classification. We use this term in the Markets Menu drop-down, the List Navigator, and the Sector Performance view. Many other vendors also use this term.
S&P: Industry Groups, State Street: Industries, Chaikin: Subsectors.
They all refer to groupings of related Industries at the sub-sector level.