July's Best Sector ETF Ideas

After a surprisingly strong June, investors now turn their attention to the start of July and the third quarter. For all the talk about the summer months being unkind to stocks, July defies that conventional wisdom. Over the past two decades, the S&P 500 has notched an average July gain of 0.3 percent.

However, the benchmark U.S. equity index has risen in just 45 percent of those Julys, according to EquityClock.com, so the seventh month of the year has the potential to be a split decision for equities. As is the case with arrival of each new month, July brings tactical opportunities at the sector level.

Sectors Deserving Attention

Using the Sector SPDR exchange-traded funds as the instruments of choice, data suggest financial services names perform well in July. Going back to 1999, the first full year of trading for the original nine sector SPDR ETFs, the Financial Select Sector SPDR Fund XLF is the best-performing SPDR in July, according to CXO Advisory. XLF averages a July gain of almost one percent, according to CXO. 

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Stung by the disappointment of the Federal Reserve once again passing on raising interest rates and the Brexit shocker, XLF lost nearly 4 percent in June, but the ETF finished the last week of the month higher. Results of the Fed's most recent stress tests boosted XLF as it is apparent many of the ETF's holdings are in increasingly improving positions to return cash to shareholders via dividends and buybacks.

Keeping with the theme of investors favoring defensive, lower beta sectors this year, the Consumer Staples Select Sect. SPDR (ETF)XLP is the second-best SPDR in July, according to CXO data. XLP has already won this year's best-performing sector ETFs with a gain of nearly 10.5 percent. The largest consumer staples ETF hit an all-time high on Thursday along with three other staples ETFs.

Sectors To Avoid

In terms of the sectors to avoid this month, there are some interesting elements to consider. The Utilities SPDR (ETF) XLU is, historically, the second-worst SPDR in July and that is interesting because XLU is one of the two best sector SPDR ETFs in June, August and September.

CXO data indicate the Energy Select Sector SPDR (ETF) XLE is the worst-performing sector SPDR ETF this month, averaging a July loss of about half a percent. That too is interesting because oil is one of the best-performing commodities during the third quarter.

Disclosure: Todd Shriber owns shares of XLF.