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Asset Watch

Should you bet on boring with the XLP ETF?

 

Tuesday, August 16 2022

Prophecies of a new bull market continue to gain steam, as the S&P 500 recorded another ferocious rally on Aug. 12. Moreover, with the U.S. equity benchmark up by more than 11% over the last month, some have their eyes on new all-time highs. Sam Stovall, Chief Investment Strategist at CFRA, said a new bull market could be upon us.

 

“This remains a bear market rally until we close above the 4,232 level on the S&P,” Stovall said. “After that, history reminds us that no bear market ever recovered 50% of its decline only to set an even lower low.” Investors have been increasingly optimistic since the S&P 500 achieved this milestone on Aug. 12.

 

However, since asset prices don’t move in a straight line, could the Consumer Staples Select Sector SPDR Fund (XLP) – the largest consumer staples ETF in the world – offer a solid risk-reward proposition?

Source: TradingView

The defensive staples sector has been the second-worst performer over the last month. However, during the S&P 500’s June and July selloffs, the XLP ETF materially outperformed and often rallied while the S&P 500 declined. Therefore, if another bout of volatility strikes, consumer staples could provide immense protection.

On the flip side, the XLP ETF’s underperformance over the last month sets the stage for some mean reversion. But if the S&P 500 continues its ascent, consumer staples may rally more to make up the lost ground.

So, is boring a solid bet?

 

Sources:

S&P 500 sector performance:

https://eresearch.fidelity.com/eresearch/markets_sectors/sectors/si_performance.jhtml?tab=siperformance

Stovall quote:

https://www.bnnbloomberg.ca/mocked-by-everyone-stock-rally-sits-at-cusp-of-a-chart-landmark-1.1804063

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