September 2019 SPDR® Sector & Industry Dashboard

SPDR? Sector & Industry Dashboard

SPDR Americas Research Team

Commentary

September 2019

Despite spikes in market volatility following the trade escalation and yield curve inversion in August, the S&P 500 Index inched up 1.2% to approach historical highs at the end of Q3. The tug-of-war between monetary easing and trade uncertainty shifted risk sentiment and sector performance. As the Federal Reserve cut rates twice in three months, rate-sensitive sectors further extended their outperformance over cyclical sectors. Sector flows followed price momentum, as investors sought out the bond-proxy sectors for both returns and yield.

Sector and Industry Spotlight XLVHealth Care Select Sector SPDR Fund FITESPDR S&P Kensho Future Security ETF XHBSPDR S&P Homebuilders ETF

With risk sentiment oscillating amid geopolitical tensions and changing expectations for monetary policy and global growth, volatility is here to stay. The sharp reversal from defensive to cyclical and value-oriented sectors in early September reminded investors of the impor tance of diversifying across defensive, growth-oriented and inexpensive exposures. Therefore, we are constructive on: health care for its attractive valuation and strong earnings sentiment, homebuilders for their inexpensive negative exposure to rates, and companies engaged in advanced security defense for their long-term growth potential.

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Sector ETF Fund Flow Heatmap

Current Quarter ($M)

Trailing 6 Months ($M)

Trailing 12 Months ($M)

Communications Consumer Discretionary Consumer Staples Energy Financial Health Care Industrials Materials Real Estate Technology Utilities

488 -364 1,640 -1,510 -3,609 -2,990 -564 163 2,069 1,717 889

1,057 284 2,619 -2,452 -3,918 -5,802 -1,121 -1,413 1,902 1,939 2,473

5,056 -3,694 4,393 -5,999 -17,976 -3,193 -5,984 -5,152 1,924 -4,145 4,716

Source: Bloomberg Finance L.P., as of 09/30/2019. This table represents the fund flows into all US listed ETFs based on their Sector Focus as defined by Bloomberg Finance, L.P. Top two and bottom two sectors per period are highlighted in green and orange, respectively.

Sector Index Returns

Previous Quarter (%)

Trailing 6 Month (%)

Trailing 12 Month (%)

Communication Services Select Sector Index Consumer Disrectionary Select Sector Index Consumer Staples Select Sector Index Energy Select Sector Index Financial Select Sector Index Health Care Select Sector Index Industrial Select Sector Index Materials Select Sector Index Real Estate Select Sector Index Technology Select Sector Index Utilities Select Sector Index S&P 500 Index

0.9

6.4

2.2

1.5

6.8

4.6

6.4

11.0

17.3

-6.2

-8.8

-19.0

2.0

10.2

3.9

-2.2

-0.9

-3.6

1.0

4.6

1.4

-0.1

6.1

2.8

7.7

10.4

24.7

3.3

9.6

8.6

9.3

13.1

27.1

1.2

5.0

2.2

Source: Bloomberg Finance, L.P., as of 09/30/2019. Top two and bottom two sectors per period are highlighted in green and orange, respectively. Communication Services Select Sector Index incepted on 04/30/2018. Past performance is not a guarantee of future results. Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income. Index performance is not representative of any investment option mentioned herein. One may not invest directly in an index.

2

Understand the Latest Market Moves by Sector Momentum, Positioning, Volatility, Correlation and Dispersion

Sector Momentum

Real Estate, Consumer Staples, Utilities and Tech led momentum, while Energy remains at the bottom.

Momentum

Technicals

3M

Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Communication Services Real Estate Utilities

7.05 9.01 -2.32 3.49 3.95 5.20 10.70 7.58 5.24 7.71 7.49

6M

8.47 11.03 -12.05 1.46 -1.14 -0.64 12.34 2.97 7.86 12.90 9.89

12M

1.21 12.66 -22.92 -5.04 -2.30 -1.47 4.98 -4.66 0.80 16.30 17.15

Momentum Z-score

0.26 0.90 -2.25 -0.57 -0.56 -0.40 0.89 -0.10 0.05 0.96 0.83

Last Px % Diff to 50 Day MVA (%) 0.2% 1.8% -0.5% 2.2% -0.6% 1.8% 0.9% 1.4% -0.8% 2.1% 4.7%

Last Px % Diff to 200 Day MVA (%) 4.8% 8.1% -5.3% 5.3% 0.1% 4.6% 8.6% 4.7% 3.8% 9.1% 11.0%

% Diff Between 50 and 200 Day MVA (%) 4.6% 6.1% -4.8% 3.1% 0.7% 2.8% 7.7% 3.2% 4.6% 6.8% 6.0%

Source: Bloomberg Finance L.P., as of 09/30/2019. Momentum is measured by S&P 500 sectors' price returns, excluding the most recent month. Communication Services Select Sector Index is used for communication services. Z-score is calculated using the mean and standard deviation of price returns of eleven sectors for each period. Sector's Momentum z-score is the simple average of the z-score of each period. Top and bottom two sectors in the first four columns are shaded in green and orange, respectively. Positive and negative numbers in the last three columns are shaded in green and orange, respectively. Past performance is not a guarantee of future results.

Sector Positioning

Positioning in Health Care is bearish, as its put/call open interest and short interest level is within the top quintile of the past one year. Positioning in Utilities appears to remain bullish, although its short interest picked up over the quarter.

Put/Call Open Interest Ratio

Short Interest as % Shares Outstanding

Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Communication Services Real Estate Utilities

Current Level

1.32 1.38 1.16 3.12 1.83 1.40 1.56 1.25 3.26 3.99 1.44

1Yr Percentile Ranking (%) 35 14 56 89 84 38 88 57 98 98 34

Current Level (%) 15.4 8.3 9.9 10.3 16.8 13.3 6.3 12.3 5.1 4.3 16.6

Prior Quarter (%) 15.5 9.1 9.6 7.3 15.4 11.3 6.7 12.8 1.8 4.8 14.9

1Yr Percentile Ranking (%) 9 39 96 87 100 74 0 70 96 48 22

Source: Bloomberg Finance L.P., as of 09/30/2019. Select Sector SPDR Fund's Put-call open interest is used to represent the sector. Short interest of all US listed sector ETFs are used to calculate short interest as % of shares outstanding. Current levels of short interest as % of shares outstanding are in green if short interest decreases from last quarter and in orange if short interest increases from last quarter. Sectors with lowest percentile ranking based on put/call ratio and % of short interest are shaded in green and highest ranking in orange.

3

Sector Implied Volatility Relative to the Broad Market

Implied volatility dropped significantly across all sectors over the past one year, with Financials' volatility decreasing from the highest to the lowest percentile.

120 -Yr Percentile Rank

100

99

99

100

89

84

92 86

88

80

68

60

60

52

53

40

30

20

25

0

2

6

6

1

Cons. Disc. Cons. Staples Energy Financials Health Care Industrials

XLY

XLP

XLE

XLF

XLV

XLI

Current

3 Months Ago

12 Months Ago

100 93

99

94 89

97 92

71

51

22

Tech XLK

35 26

17

4

Materials Comm. Svs Real Estate

XLB

XLC

XLRE

19

Utilities XLU

Source: Bloomberg Finance L.P., as of 09/30/2019.

Sector Correlation and Dispersion

Investors' sentiment shift between defensive and cyclical sectors has increased sector correlation and widened the performance gap among sectors.

60 Dispersion ( )

Correlation 0.7

50

0.6

0.5 40

0.4 30

0.3

20 0.2

10

0.1

0

0.0

Oct

May

Dec

Jul

Feb

Sep

1-Year Return Dispersion Inter-Sector Correlation (90-Day Rolling)

3-Year Average Dispersion 3-Year Average Correlation

Source: Bloomberg Finance L.P., as of 09/30/2019. Dispersion is measured as the return differences between the best and worst performing sectors on a trailing 1 year basis. Correlation is the average correlations between each pair of 11 GICS sectors over the 90-day period. Past performance is not a guarantee of future results. Characteristics are as of the date indicated and should not be relied upon as current thereafter.

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Analyze Sector Opportunities by Examining Valuation, Earnings Growth and Sentiment

Sector Valuations Z-score Valuations of Utilities appear stretched relative to its own history and the broader market, while Health Care valuations have become more attractive.

2 Valuation Relative to the S&P

Q2 2019 S&P 500 ex-Energy Sector Earnings Growth and Surprise Health Care and Financials led earnings growth and beat analyst expectations by a large margin. Materials' earnings growth was most negative with little upside surprise.

12 Earnings Surprise ( )

Expensive Valuation Attractive Valuation

Financials

1 Health Care

Industrials

Materials Energy

Communication

0

Real Estate

Cons. Staples

-1

Technology Cons. Disc.

Utilities

Expensive Valuation

-2

-1.5 -1.0 -0.5

0

Valuations Relative to Sector History

Attractive Valuation 0.5 1.0 1.5

8

Tech. Financials

Industrials

S&P

Health Care

4

Cons. Disc.

Cons. Staples

Utilities

Materials

Real Estate

0

Communication

-4

-20 -16 -12 -8 -4 0

4

8 12

Q Earnings Growth ( )

Source: FactSet, as of 09/30/2019. Sectors are represented by the S&P 500 GICS Sector Index. Z-scores are the average of the percentile ranking of sector trailing price-to-earnings (P/E), next twelve month price-to-earnings (NTM P/E), price-to-book (P/B) and price-to-sales (P/S) over the past 15 years. Sectors with cheaper valuation will have higher z-scores.

Source: FactSet, as of 09/30/2019. Sectors are represented by the S&P 500 GICS Sector Index.

Earnings Revision Analysts upgraded their earnings and sales estimates for Health Care companies broadly, while being more pessimistic about growth in Energy and Materials.

Cons. Disc. Consumer Staples Energy Financials Health Care Industrials Tech. Materials Comm. Svs. Real Estate Utilities

2019 Earnings Est.

Upgrade to Revision Downgrade (%) in 3M Ratio

1.20

-2.19

1.13

0.24

0.35

-13.32

1.27

-2.13

9.40

0.02

1.14

-1.61

1.85

0.43

1.00

-3.16

2.00

0.77

2.86

4.38

4.67

-0.13

2019 Sales Est.

Upgrade to Revision Downgrade (%) in 3M Ratio

0.81

0.21

0.73

0.00

0.05

-1.35

0.62

-0.44

1.37

0.94

0.39

-0.06

0.48

0.87

0.38

-2.25

0.73

-0.09

3.25

0.06

0.63

0.15

Source: FactSet, as of 09/30/2019. Sectors are represented by the S&P 500 GICS Sector Index. Top and bottom two sectors in each column are highlighted in green and orange, respectively.

Analysts' Earnings Estimate Dispersion and Price Target Changes Analysts had the greatest consensus on earnings prospects of Health Care, Utilities and Consumer Staples. However, they were less bullish on the price target for Health Care.

10 Percent

8

6

4

2

0 Cons.

Staples

Tech.

UtilitiesCons. DiscC.omm. Svs. MaterialHs ealth Care Financials Industrials

Average of Earnings Est. Standard Deviation

Price Target Change Since 06/28/2019

Source: FactSet, as of 09/30/2019. Sectors are represented by the S&P 500 GICS Sector Index.

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