Best Sector ETFs For September: Fed Plays

September trading arrives and if history is an accurate, the ninth month of the year could be tricky to navigate for domestic equities.

Over the past two decades, the S&P 500 has averaged September losses of 0.8 percent, making that month the second-worst month of the year on average for the benchmark U.S. equity gauge. Of course, those historical trends don't hold true every month. For example, heading into this year, the S&P 500 averaged a 1 percent loss in August over the past 20 years, but that index is up more than 3 percent this year for the month of August.

What Happened

With September being a historically rough month for U.S. stocks, sector-level opportunities are hard to come by. Using the original nine sector SPDR exchange-traded funds as the barometers, data indicate just two of those ETFs average positive September returns.

Since 1999, the first full year of trading for the sector SPDR ETFs, the best performer in September is the Financial Select Sector SPDR ETF XLF. XLF, the largest financial services ETF, averages a modest September gain, according to CXO Advisory data.

Month-to-date, XLF is up 1.5 percent, but traders could embrace the fund amid expectations it's almost a sure thing that the Federal Reserve will raise interest rates for the third time this year in September.

Why It's Important

Looking at potential sector ETF winners for September 2018 through the lens of further Fed tightening, it may be interesting to learn that the Utilities Select Sector SPDR XLU is usually the second-best SPDR in September, according to CXO data.

XLU is up 2.4 percent in August, but the largest utilities ETF's recent bullishness could be challenged by another rate hike because the utilities sector is usually inversely correlated to rising Treasury yields.

After September, XLU ranks as one of the two worst sector SPDRs in October and November.

What's Next

Speaking of bad sector ideas on a monthly basis, the Materials Select Sector SPDR XLB usually struggles in September, averaging losses of about 2.5 percent in the ninth month of the year. However, investors may want to give XLB a chance later in the month because the materials ETF is one of the two best SPDRs, historically speaking, in each month of the fourth quarter, according to CXO data.

Disclosure: The author owns shares of XLF.

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