REITs are currently the third largest industry group within XLF at 14.20% and have dragged on returns since the beginning of the year. The iShares U.S. Real Estate ETF (IYR) has experienced the same interest rate sensitive drag as utility stocks and is down 5.5% in 2015.
Conversely, indexes that focus solely on banking stocks such as the SPDR S&P Bank ETF (KBE) have gained 8.87% this year. Clearly these stocks are the true beneficiaries of the rising interest rate theme as it relates to a fundamental driver of industry returns.
Ultimately, XLF appears to be experiencing its own internal tug-of-war based on this bifurcation between sub-sectors that has caused it to drift aimlessly for the last six months.
The Bottom Line
The information presented above can be applicable to both broad-based indices and individual sector investing. Investors that own diversified equity ETFs need to be cognizant of the underlying asset allocation and sector positioning as it relates to future risk and returns.
Those that prefer to select more targeted ETFs may choose to shift their positions in order to take advantage of a specific theme or pair back on an overbought area of the market. Making small tactical changes of this nature can have a big impact on your performance and risk profile as we make our way into the second half of the year.
This article is brought to you courtesy of David Fabian from FMD Capital Management.