Performance Spread of Equity Sector Specific ETFs

This week, we’re taking a look at some of the most popular sector specific ETFs on the market, from Energy to Real Estate, and examining their performance through June 19 (the date of writing). The return dispersion we see is quite well explained by the impact of COVID-19 and related shut- and lock-downs on corresponding line of businesses, but despite being “obvious” it is quite visually striking when put into numbers:

Performance Spread of Equity Sector Specific ETFs

The overall difference is close to 48%, with the whole market represented by the S&P 500 being squarely in the middle. The second interesting observation is that, being equities, different sectors have very high correlation values to each other, but it does not stop them from having such a dramatic difference in returns. The table below may be difficult to see, but it is dominated by high 80s, and 90s, with a few 70s and maybe a couple of 65 percent correlations.

Correlations of Equity Sector Specific ETFs

This highlights the important aspect of correlation one more time – it is insensitive to “alpha”, or the “value added”, and is driven by the common directional moves, disregarding whether assets consistently make or lose value over time on a relative basis. This is also highlighted by the high correlation to the market overall and a beta of around 1.

The effect can also be visualized by a growth of 1,000 charts (usually called VAMI but since it is not “Monthly” but “Daily” it should be technically called “VADI” – Value Added Daily Index). We can see that the lines are mimicking each other’s moves very closely, and yet half of them are being pulled up and the other half pulled down relative to the middle, which happens to be the market overall.

Growth of 1000 Chart for Equity Sector Specific ETFs

The interesting question is whether this behaviour is going to continue. The world realized the need to start moving before the economic impact turns into a disaster worse than the pandemic itself, but at the same time, is still being cautious now that reports of a second wave are beginning to surface. 

To me personally, the experience resembles a strong concussion, when after the impact one’s head is spinning and the earth is floating away from under one’s feet initially, but then things seem to get back to normal after a short while. What is important is to quickly diagnose and attempt to remedy the potential of long lasting deep trauma. Without this crucial step, a complete recovery will be very difficult to achieve.

This post is part of our Alpha-Week Blog