Best Sector ETFs For September: Playing It Safe

August lived up to its historical billing as the worst month for U.S. equities. While the S&P 500's modest decline did not match the average 1.3-percent drop seen in the previous 20 Augusts, this August was the first month of 2017 in which the benchmark U.S. equity index closed in the red.

Now, September is here and the arrival of the ninth month of year could bring additional struggles for U.S. equities. On a historical basis, September is the second-worst month of the year for the S&P 500 behind only August. Over the past 20 Septembers, the S&P 500 has averaged a decline of 0.6 percent, according to EquityClock.com.

At the sector level, there are opportunities in September, but given the month's often ominous reputation, it may not be surprising to learn that some of the best-performing sector exchange-traded funds in September are defensive plays.

Turn The Lights On

Despite two interest rate hikes by the Federal Reserve this year with plans for another by year-end, the rate-sensitive utilities sector is setting a torrid pace. The Utilities Select Sector SPDR XLU is up more than 13 percent year to date. XLU and rival utilities ETFs currently reside near all-time highs.

That is a positive heading into September, one of the months in which XLU is the best-performing sector SPDR ETF. Dating back to 1999, the first full year of trading for the sector SPDRs, XLU averages a September gain of almost 1 percent, according to CXO Advisory data. 

The Consumer Staples Select Sector SPDR XLP, another defensive play, is the second-best SPDR in September on a historical basis. However, underscoring September's dour reputation, XLP averages a modest September decline, according to CXO.

XLP, the largest consumer staples ETF, is up just 5.8 percent year-to-date and has seen $1.7 billion in third-quarter outflows, more than any other ETF.

September Isn't Kind To These ETFs

Sure it is up about 10 percent this year, but the September precedent for the Materials Select Sector SPDR XLB is gloomy. XLB, the largest materials ETF by assets, averages a September decline of nearly 3 percent, according to CXO data.

The Technology Select Sector SPDR XLK is usually the second-worst sector SPDR ETF in September, averaging a decline of 2 percent. This year, XLK is the best-performing sector SPDR fund as investors have continually bid tech stocks higher. Given investors' enthusiasm for the sector, it is not unreasonable to expect XLK to betray its historical reputation this September.

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