3 Sector ETFs to Watch for the Budget Battle - ETF News And Commentary
27 September 2013 - 10:01PM
Zacks
This has been an eventful week for the broad U.S. markets, with two
impending government financial deadlines. All eyes are currently on
the political gridlock (between White House and Republican
lawmakers) over government funding and the debt ceiling as the new
fiscal year is about to begin on October 1
st.
Fears over the possible government shutdown are growing if Congress
does not pass a federal budget before September 30
th.
Additionally, the government is seeking an increase in the debt
ceiling, which expires on October 17
th.
Budget Debate Creeps In
Republicans are demanding expenditure cuts of an equal amount in
exchange for the increase in the $16.7 trillion debt limit.
However, President Barrack Obama does not favor any cut in spending
to raise the limit of borrowing. This talk resulted in a dispute
between the two and a failure to reach a higher debt limit could
shake the financial markets and hamper consumer confidence.
The U.S. Treasury bond is the benchmark of the world's financial
markets. The government has avoided any default so far, but could
begin a technical default by the end of October or mid November if
Congress does not approve the increase, as only $30 billion in
Treasury cash would be left by the deadline (read: Time to Buy
Treasury Bond ETFs?).
This debate reminds us of a similar situation two years back when
Standard & Poor’s downgraded the pristine AAA credit rating for
the country. At that time, the White House and Republicans
disagreed on spending cuts and other key budget issues, leading to
a similar investor alarm.
ETFs to Watch
Given the looming budget battle in Congress, the following three
sector ETFs are in focus this week and will remain so in the next.
These products could see adverse trading conditions should the
government fail to raise the debt limit:
iShares Dow Jones U.S. Aerospace & Defense Index Fund
(ITA)
This fund provides broad exposure to the aerospace and defense
industry by tracking the Dow Jones U.S. Select Aerospace &
Defense Index. The fund has accumulated $190.3 million in AUM while
charging 46 bps in fees a year. Volume is light, probably
increasing the total cost for the fund.
With holdings of 38 stocks, the fund allocates higher weight to the
top two firms – United Technologies (UTX) and Boeing (BA) – at
9.82% and 9.55%, respectively. Other securities do not hold more
than 6.26% of total assets. From a sector perspective, aerospace
has been the top priority representing 55.7% of ITA while defense
takes the remainder of the basket.
The ETF lost about 2.5% in the last five trading session while it
is up 36.16% in the year-to-date time frame (read: Play a Surging
Defense Industry with These 3 ETFs). The fund currently has a Zacks
ETF Rank of 1 or ‘Strong Buy’ rating with ‘Low’ risk outlook. This
suggests that the product is expected to outperform its peers over
the next one year.
SPDR Health Care Select Sector Fund
(XLV)
This is by far the most popular and liquid choice in the healthcare
space with AUM of over $7.5 billion and average daily volume of
roughly eight million shares. The fund follows the S&P
Health Care Select Sector Index and charges just 18 bps in fees a
year (see: all the Healthcare ETFs here).
In total, the product holds 57 securities and is heavily dependent
on the top three firms – Johnson & Johnson (JNJ), Pfizer (PFE)
and Merck (MRK) – at 12.65%, 9.67% and 7.07%, respectively. In
terms of sector holdings, pharmaceuticals take the top spot with
45% share while biotechnology (18.54%), providers & equipment
(16.03%) and equipment & suppliers (15.67%) round out the next
three spots.
XLV is down nearly 2.6% in the past five days but gained over 28%
so far this year. The fund currently has a Zacks ETF Rank of 3 or
‘Hold’ rating with ‘Low’ risk outlook.
Financial Select Sector SPDR Fund ETF
(XLF)
This is the largest and cheapest fund in the financials space,
charging just 0.18% in expenses. The fund tracks S&P Financial
Select Sector Index and has amassed over $15 billion in its asset
base. Volume is massive, trading in more than 46 million shares a
day.
The product holds 83 securities in its basket, with top allocations
to Berkshire Hathaway (BRK.A), Wells Fargo (WFC) and JP Morgan
(JPM). These securities make up for a combined 24% share. The ETF
is quite spread across sectors with diversified financial service
taking 32.19% share, followed by insurance and commercial banks
with at least 17% share each.
XLF also lost around 2.4% in the past five sessions but is up
nearly 24% YTD. The product currently has a Zacks ETF Rank of 2 or
‘Buy’ rating with ‘Low’ risk outlook (read: Financial ETFs Tumble
on Citigroup Warning).
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ISHARS-US AEROS (ITA): ETF Research Reports
SPDR-FINL SELS (XLF): ETF Research Reports
SPDR-HLTH CR (XLV): ETF Research Reports
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