Best Sector ETFs For January: Trying To Get Healthy

The first month of the new year is here and with that come hopes one of the longest bull markets in U.S. history will keep going.

Historically, January isn't a great month for stocks.

Over the past 20 years, the S&P 500 has notched an average January loss of a tenth of a percent while finishing higher in just 55 percent of those Januarys, according to EquityClock.com. January is one of five months to average a negative performance over the past two decades, but it's tied with February for “best of the worst” honors.

Of course, there are sector-level opportunities to consider this month and one such opportunity is a bet on 2016's worst-performing sector.

Healthcare (XLV)

The Health Care Select Sector SPDR XLV, the largest healthcare exchange traded fund by assets, is usually the best-performing member of the sector SPDR ETF suite in January, according to CXO Advisory data.

XLV has some work to do to live up to its historical precedent. Healthcare, the third-largest sector weight in the S&P 500, was the only sector to lose ground last year. That means XLV finished lower by 2.8 percent in 2016, its first annual loss in eight years.

Since 1999, the first full year of trading for the sector SPDR suite, XLV has averaged a January of about 1.5 percent. XLV gained 1.5 percent in December, the month in which the ETF is usually the second-best member of the SPDR suite.

Technology (XLK)

Coming off a 2016 gain, the Technology Select Sector SPDR XLK is usually the second-best SPDR ETF in January behind XLV. However, XLK's average January gain is just about half a percent, according to CXO data.

Last year, investors added about $99.5 million to XLV while pulling nearly $324 million from XLK, the largest technology ETF.

Industrials (XLI

On a historical basis, the two worst-performing sector SPDRs in January are two of 2016 best performers. The Materials Select Sector SPDR XLB and the Industrial Select SPDR XLI each average losses of about 2 percent in the first month of the year, according to CXO data.

XLI and XLB returned 20 percent and 16.8 percent, respectively, last year.

The near-term market environment favors industrials. Industrials are a cyclical group, and cyclicals historically outperform in the latter stages of the business cycle. Additionally, cyclical groups have historically been durable in the face of rising interest rates. With the possibility of the Federal Reserve boosting rates three times this year, industrials make for an ideal sector bet.