Stock Market Is Tech vs the Rest, Sector ETFs Show

Now that I’ve written about the 11 S&P 500 sectors this summer, I thought I’d try my hand at doing some research—the kind of stuff that often crosses financial advisors' and journalists' desks—in the hopes of offering insights and maybe something quotable.

I reviewed return and risk data for the 11 sector SPDRs, each of which is the 800-pound gorilla of its peer group. That has a lot to do with the issuer, State Street, getting the coveted “first mover advantage” by issuing this ETF series way back in 1998, just five years after the listing of the very first ETF in the United States.  

I looked at two distinct time periods. I examined the past three years and the past ten years, through Friday, July 26, 2024. The three-year time frame is significant because most of its duration covers the time since the Fed started to raise interest rates. I also looked at a 10-year time frame, to compare that much longer period with the more contemporary one.  

Tech Stocks: A League of Their Own

Like the classic movie by that name, the other 10 sectors could be forgiven for breaking the rule of “there’s no crying in investing.” But when we look at the 10-year returns, the Technology Select Sector SPDR ETF (XLK) was up 521%, more than six times. The next closest sector ETF was the Consumer Discretionary Select Sector ETF (XLY), which more than tripled.  

Yes, you read that correctly. Tech outperformed the other 10 sectors by more than 300%. In fact, it returned nearly four times that of five of the other eight sectors that have been around that long (REITs and communication services were added during the past 10 years).

Yet with an annualized 10-year standard deviation of around 19%, XLK was in the middle of the pack in that regard. Energy, financials and consumer discretionary all topped a 20% standard deviation.

Sector ETFs For Risk Management  

Also notable was the risk-averse nature of the Consumer Staples Select Sector SPDR ETF (XLP). It's worst month at any point during the 10-year study was a dip of 8.9%, followed closely by healthcare at 9.4%. Several sectors fell 15% or more at some point during that decade-long period.

Energy is the performance leader, more than doubling, albeit with much of that move occurring during the first 12 months of that three-year time frame, with the SPDR Select Sector Energy ETF (XLE) doubling in a year.

Investors might be overlooking how the recent surge in the S&P 500 index was in large part just a recovery from a horrendous year in 2022. That shows up when we look at the three-year total returns (not annualized) of the 11 sectors. Three of them gained less than 3% in total, so less than 1% per year, while only energy and tech gained more than 28% total over those 36 months.  

This reminds us how cyclical equity investing is, and why ETFs can help parse the market in so many ways to help us perform and manage risk.

Calmar (Not Another Name for Squid!)

The final highlight I wanted to share from this study is my review of the past three years through the lens of what is called a “Calmar Ratio.” Created more than 30 years ago by a California professor, I have found it to be simple and effective for ETF analysis. And it has nothing to do with “calamari,” a fancy name for squid.

The Calmar Ratio takes the three-year annualized return (minus the “risk free rate” a.k.a. US T-bills) and divides it by the maximum peak-to-trough decline in that asset over the same period. In other words, Calmar measures how much return was generated per year, offset by the worst-case scenario that occurred during that time. To me, this is a nice shortcut to analyze whether the reward is worth the risk. It is backward looking, so part of the challenge to ETF investors is to determine if the past indicates what will be in the future.

XLK and XLE naturally have stellar Calmar Ratios, but their ability to continue that way is questionable. The Healthcare and industrial sectors generated strong figures here as well.

The stock market is clearly at a pivot point. The past 10 years are unlikely to be repeated, and the past three years were characterized by unprecedented events. This is just the tip of the iceberg in terms of analysis, but I encourage advisors and investors to dig deeper, and question everything. That’s investing, at least to me.