Best Sector ETFs For October: 3 Stocks Really Matter

October is here and despite the month's reputation for ominous market events, the tenth month of the year is often kind to U.S. stocks. Over the past 20 years, the S&P 500 averaged October gains of 2.2 percent, according to EquityClock.com.

That makes October the best month of the year in terms of average returns for the S&P 500, slightly outperforming March.

October equity market strength is felt at the sector level. Historical data confirm that since 1999, the first full year of trading for the original nine sector SPDR exchange traded funds, all nine of those funds average positive returns in October.

What's interesting about the two sector SPDR ETFs that are usually the best performers in October is that these two funds are dominated by a small number of stocks.

A Graveyard Smash

The Materials Select Sector SPDR XLB, the largest ETF by assets tracking that sector, averages October gains of close to 3 percent, according to CXO Advisory data. That makes XLB the second-best sector SPDR in October, on a historical basis.

If historical trends hold true to form, XLB could be worth holding throughout the fourth quarter as it ranks as one of the two best SPDRs in each of the three months of the year's final quarter, according to CXO data.

DowDuPont Inc. DWDP will play a big role in XLB's ability to live up to historical billing because that stocks accounts for over 22 percent of the ETF's weight, more than double the weight assigned to any of the fund's other holdings.

The Technology Select Sector SPDR XLK is usually the best-performing sector SPDR in October, averaging gains of over 3 percent, according to CXO data.

With the recent debut of the communication services sector, XLK will have to defend its October reputation without some familiar names. Some stocks previously classified as technology names moved over to communication services, leaving XLK's fortunes largely in the hands of just two stocks.

Apple Inc. AAPL and Microsoft Corp. MSFT now combine for over 37 percent of XLK's weight.

Trick Or Treat

The rate-sensitive Utilities Select Sector SPDR XLU and the Health Care Select Sector SPDR XLV are usually the two worst-performing sector SPDRs in October, but that's not necessarily bad news.

Underscoring the month's strong reputation, XLU and XLV average October gains of about 1.6 percent, according to CXO data.

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