Best Sector ETFs For August: An Interesting Mix

Tuesday marks the arrival of August, historically one of the worst months for U.S. equities. On average over the past two decades, the S&P 500 has lost 1.3 percent in the eighth month of the year, according to data from EquityClock.com.

Said differently, August is, at least on average over the past 20 years, the worst month of the year for the S&P 500. Furthermore, the benchmark U.S. equity gauge's average August decline over that span is more than twice as bad as what is seen in the second-worst month of the year, that being September.

As is the case with the other 11 months of the year, there are sector-level opportunities available in August, but in this particular month it is often a case of less bad at the sector level and less about generating legitimate upside.

Playing It Safe

Going back to 1999, the first full year of trading for the sector SPDR suite of exchange-traded funds, the best August performer is the Consumer Staples Select Sector SPDR XLP, according to CXO Advisory.

XLP, the largest consumer staples ETF by assets, usually averages a negligible August gain, underscoring the broader markets historical weakness in the eighth month of the year. 

Throughout 2017, investors have been favoring higher beta momentum and growth stocks, a scenario that has saddled XLP with a market-lagging 7 percent year-to-date gain. That means the giant staples ETF is trailing the S&P 500 by 340 basis points this year.

Time For Tech?

Well, maybe. The Technology Select Sector SPDR XLK is the second-best SPDR, on average, in August, according to CXO. Like its staples counterpart, XLK averages a barely noticeable August gain, but hey, that is better than the S&P 500's historical August showings.

XLK, the largest technology ETF, is the best performer among the sector SPDR ETFs in 2017 with a gain of nearly 19 percent.

Steer Clear

If history repeats in August, investors would do well to brace for some downside with the Health Care Select Sector SPDR XLV and the Consumer Discretionary Select Sector SPDR XLY.

Those are the two worst sector SPDRs in August as both average modest loss of less 1 percent in the eighth month of the year, according to CXO data. XLY and XLV are up 12.3 percent and 17 percent, respectively, year to date.