There have been times this year, including parts of the second quarter, where defensive sectors had their moments over cyclical groups, but it appears the latter are reasserting themselves. The Direxion MSCI USA Cyclicals Over Defensives ETF RWCD is the exchange-traded fund for that theme.
What Happened
RWCD tracks the MSCI USA Cyclical Sectors – USA Defensive Sectors 150/50 Return Spread Index. That's a mouthful, but the index's objective is easy to understand. That benchmark has a 150% long position in cyclical sectors and a 50% short position in defensive segments to deliver 100% net long exposure.
In other words, RWCD allows investors to participate in the bullishness of aggressive sectors while taking advantage of any subsequent downside in lower volatility groups.
Why It's Important
RWCD has been showing some signs of life, indicating it could be worth a look for tactical investors.
“The dynamic between Cyclical Sectors and Defensive Sectors continues to be interesting,” said Direxion in a recent note. “While previous months saw Cyclical Sectors leading on the back of the Information Technology sector, the 0.88% relative outperformance throughout June in cyclical names was driven by leadership in the Materials sector. Technology names outperformed the broader market in June, but the leadership via Materials is a good sign of market breadth and recovery in names that have been year-to-date laggards.”
With its cyclical tilt and 150% long exposure, RWCD's underlying index allocates over 90% of its weight to the technology, consumer discretionary and communication services sectors.
What's Next
“The 0.88% spread between Cyclical and Defensive stocks is the second smallest monthly spread on record for the year so far, but the outperformance is notable given the 3.10% underperformance we saw throughout the month of May,” according to Direxion. “Bond proxy sectors such as Utilities and Real Estate were, by far, the largest laggards in June, and were large contributors to the relative performance spread; another sign of a more 'risk-on' tune.”
If the Federal Reserve obliges with an interest rate over the near-term, it would not be surprising to see RWCD add to its recent strength, but there is some risk to that thesis because some defensive sectors would likely rally on the back of lower rates, too.
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