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Due Diligence on Sector Leadership


Head of SPDR Americas Research

To quell the recent rumblings, Matthew Bartolini performed a data-driven due diligence on the Select Sector SPDR lineup and its market leadership position in cost, liquidity, and assets.

With dispersion elevated throughout the pandemic, investors have gravitated toward sector exposures to express their market directional views. In Q2, sector ETFs listed in the US had their most inflows for a quarter since Q4 2016,1  featuring certain sectors posting their largest monthly flows ever (Health Care and Technology) in April. We know this because sector investing is in our heritage, and we continue to discuss the role sector strategies can play in the portfolio construction process.

Oddly, however, based on a competitor’s technology funds recently overtaking XLK , the Technology Select Sector SPDR Fund, in assets – an event that has occurred before – there are some rumblings regarding the suite’s prowess and prominent position.

Rumblings can turn into rumors, and rumors can turn into beliefs – regardless of what the data says. And my team performs a lot of data-driven due diligence on strategies. So as to quell the recent rumblings, the following is a data-driven due diligence on the Select Sector SPDR lineup and its market leadership position in cost, liquidity, and assets.

Cost considerations

Costs are important. However, as we have discussed previously, expense ratios are just one piece of the total cost of ownership (TCO). Investors need to consider the bid-ask spread (i.e., trading costs) to really triangulate on the cost of utilizing a specific ETF to obtain an exposure.

The bid-ask spread for each Select Sector SPDR ETF has been a penny wide, on average. That means the suite’s average is a penny. And those spreads have stayed quite tight during periods of both tranquility and volatility. Meanwhile, the average bid-ask spread for the collection of the next 10 largest non-SPDR ETFs2  are much wider, and not a penny. What’s more, they may fluctuate randomly based on market conditions — specifically, during times of volatility, right when investors are likely seeking to reposition or meet client cash flow demands (i.e., when they need liquidity the most).

The chart below plots the averages throughout 2020 for these two “suites” to illustrate the SPDR Suite’s clear advantage from a trading cost perspective and, ultimately, from a total cost view as well.

SPDR: AVG daily bid ask spreads

Source: Bloomberg Finance L.P. as of 07/09/2020 based on calculations and classifications by SPDR Americas Research. Past performance is not a guarantee of future results.

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1 Bloomberg Finance L.P. as of 07/09/2020 based on SPDR Americas Research calculations
2 Using the next 10 largest sector ETFs is meant to not have any thinly traded ETFs produce averages that are filled with outliers. This aspect actually leads to a tighter – yet still wide, honestly – delta relative to the Select Sector SPDRs. If I were trying to data mine, I would have just used the rest of the industry. But that is not a fair, apples-to-apples comparison, and data integrity is important when letting data tell a story.
3 Blended screen of three-, six-, and twelve-month momentum metrics on S&P 500 GICS Sectors.
Based on trailing six-month average daily volumes as of 07/09/2020 per data from Bloomberg Finance L.P.
5 Based on total daily volumes as of 07/09/2020 from 1/1/2020 per data from Bloomberg Finance L.P. Rest of industry does not include SPDR industry lineup so as to not show a stat that “competes against ourselves.”
6 In September 2018, certain Consumer Discretionary, Telecom, and Information Technology stocks formed a new sector: Communication Services.
7 Real Estate is the only other, and that, too, had a GICS re-map that changed the landscape back in 2016.
8 Based on Bloomberg Finance L.P. data as of 06/30/2020, per calculations from SPDR Americas Research.
9 Bloomberg Finance L.P. as of 07/09/2020 based on calculations and classifications by SPDR Americas Research.
10 Bloomberg Finance L.P. as of 07/09/2020 based on calculations and classifications by SPDR Americas Research.

Originally Posted on July 15, 2020 – Due Diligence on Sector Leadership


The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.

The views expressed in this material are the views of SPDR ETFs and SSGA Funds Research Team through the period ended July, 13, 2020 and are subject to change based on market and other conditions and do not necessarily represent the views of State Street Global Advisors or any of its affiliates. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or
developments may differ materially from those projected. The information provided does not constitute investment advice and it should not be relied on as such.

Frequent trading of ETFs could significantly increase commissions and other costs such that they may offset any savings from low fees or costs.

Diversification does not ensure a profit or guarantee against loss.

Concentrated investments in a particular sector or industry tend to be more volatile than the overall market and increases risk that events negatively affecting such sectors or industries could reduce returns, potentially causing the value of the Fund’s shares to decrease.

Passively managed funds invest by sampling the Index, holding a range of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. This may cause the fund to experience tracking errors relative to performance of the Index.

Equity securities may fluctuate in value in response to the activities of individual companies and general market and economic conditions. Funds investing in a single sector may be subject to more volatility than funds investing in a diverse group of sectors.

Investing involves risk including the risk of loss of principal.

Growth stocks may underperform stocks in other broad style categories (and the stock market as a whole) over any period of time and may shift in and out of favor with investors generally, sometimes rapidly.

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