Utilities Surge To Top Sector Spot

One sector is far ahead of the pack so far in 2016.

Senior ETF Analyst
Reviewed by: Sumit Roy
Edited by: Sumit Roy

With stocks off to their worst start since 2008, it's hard to find any bright spots in the market. The SPDR S&P 500 (SPY | A-98) is down 8.4% for 2016 as of this writing, and essentially every sector is in the red for the year.

But not all of them.

One of the 10 main sectors has actually rallied this year―and quite substantially. Meanwhile, the worst-performing sector of the year may surprise you. (Hint: it's not the worst performer of last year.)

Here we take a look at the six most noteworthy sector moves of 2016 so far:

Utilities Jump

The third-worst-performing sector of 2015, utilities have made a solid comeback in early 2016. Interest rates, which were expected to rise this year, actually fell substantially in January and early February, with the 10-year bond yield dipping to as low as 1.68% from 2.27% on Dec. 31 on the back of market turmoil.

As relatively safe businesses with high-dividend payouts, utilities are seen by some as an alternative to Treasurys. With government yields down, those dividends suddenly look more attractive. The Utilities Select SPDR (XLU | A-87) currently yields 3.5% and has returned 7.1% year-to-date.

Energy Not As Bad

Easily the biggest laggard of 2015 with its 21.5% loss, the energy sector finds itself in the middle of the pack this year. With its 9.6% year-to-date decline, perhaps the downtrend in the Energy Select SPDR (XLE | A-92) is beginning to slow.

That said, it's hard to get excited about energy from a fundamental standpoint in the near term. Many oil and gas firms face bankruptcy with prices this low, and dividends are being slashed aggressively.

Certainly, there's a case to be made for higher oil prices down the line, but investors may need to wait a while to see a sustainable turnaround.

Financials Fall To The Bottom
Financials edged just slightly lower in 2015, with a 1.7% decline. Apparently, that was the calm before the storm, because this year the sector is facing tough sledding. The Financial Select SPDR (XLF | A-93) shed 13.7% so far in 2016, putting it squarely at the bottom of the sectors list.

For U.S. banks, which are leading the charge lower in financials, low rates and energy exposure seem to be the biggest concerns. But with many of the big banks down 50% from their recent highs, some are beginning to wonder whether this sell-off is overdone.

Consumer Discretionary Falls Out Of Favor

With its 9.9% rise in 2015, consumer discretionary took the top spot in terms of returns last year. So far in 2016, the sector essentially wiped out all those gains, as the Consumer Discretionary Select SPDR (XLY | A-97) dipped 11.4%.

XLY is as domestic-focused an ETF as you will find; thus, the performance largely depends on the outlook for the U.S. economy. While still one of the stronger regions of the world economically, lately, U.S. recession fears have grown.

The question is whether the service economy in the U.S. can avoid being dragged down by the struggling manufacturing economy. If so, XLY—with its heavy weighting in retailers, media and entertainment companies—could bounce back later this year.

Staples Still A Safe Haven

The most consistent of all the sectors, consumer staples did well in 2015, and continues to do relatively well in 2016. The Consumer Staples Select SPDR (XLP | A-95) was last trading less than 1% lower year-to-date after gaining 6.9% last year.

Considered a safe haven with holdings such as Procter & Gamble, Coca-Cola and Philip Morris, it's no surprise to see XLP doing well in the current volatile market environment.

Mega-Cap-Heavy Tech Loses Momentum

The roaring rally in some of the mega-cap tech stocks of 2015 reversed in a big way early in 2016. Facebook, Microsoft, and Google tumbled over the past several sessions as traders cashed out of their momentum tech stocks―some of the few names that were holding up well until recently.

Now the iShares U.S. Technology ETF (IYW | A-98), which has a 50% weighting in those three stocks plus Apple, is down a market-lagging 11.4%.

Fundamentally, these giant tech companies seem to be on solid footing. They're all cash-rich, and aside from Apple, are seeing better-than-expected earnings and revenue growth. Nevertheless, broad market movements may have more of an impact on returns in the near term than what's going on with the individual companies.

Contact Sumit Roy at [email protected].

Sumit Roy is the senior ETF analyst for etf.com, where he has worked for 13 years. He creates a variety of content for the platform, including news articles, analysis pieces, videos and podcasts.

Before joining etf.com, Sumit was the managing editor and commodities analyst for Hard Assets Investor. In those roles, he was responsible for most of the operations of HAI, a website dedicated to education about commodities investing.

Though he still closely follows the commodities beat, Sumit covers a much broader assortment of topics for etf.com, with a particular focus on stock and bond exchange-traded funds.

He is the host of etf.com’s Talk ETFs, a popular video series that features weekly interviews with thought leaders in the ETF industry. Sumit is also co-host of Exchange Traded Fridays, etf.com’s weekly podcast series.

He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing chess and snowboarding in Lake Tahoe.