Pick and choose the financial services or healthcare sectors and investors have been rewarded this year.
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For example, the Financial Select Sector SPDR (XLF), the largest financial services exchange traded fund, is up 6.4 percent year-to-date. The Health Care Select Sector SPDR (XLV) is higher by 11.1 percent as the S&P 500's third-largest sector weight continues rebounding from its 2016 lethargy.
Based solely on those returns, being long XLF and XLV has been the right idea this year, but it might be time to consider a short XLF/long XLV strategy.
Politics remain at play for both sectors, but financials could be running low on near- to medium-term catalysts and may be over-owned by professional investors.
"From a top-down standpoint, longs can only point to rolling back Dodd-Frank as a positive catalyst, and that's a stretch considering the Trump Administration doesn't have the capital for that timing wise because of healthcare and tax reform, which are much higher up on the priority list, and in their own world of chaos currently, said Rareview Macro founder Neil Azous in a note out Thursday.
Of course, there are policy concerns for the healthcare sector, too, not the least of which include the effort to repeal the Affordable Care Act. However, the Republican effort to rollback the ACA could take months or even drag into next year. With 2018 being a mid-term election year, the idea could take a backseat as politicians seek reelection. In the meantime, healthcare is underowned at the professional level, even with a spate of recent inflows to XLV.
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Investors are underweight them on policy concerns, Azous said of the healthcare sector. They are the defensive leadership on almost any sector or industry metric this year. Pharma and Biotech are breaking out on the charts.
Perhaps part of the bullish thesis surrounding XLV and healthcare at large is that election year rhetoric was an albatross on the sector and, obviously, the U.S. presidential election is in investors' rear view mirrors.
Based on issuer data, XLF is cheaper on valuation than XLV, but a ratio chart of XLV vs. XLF supplied by Azous underscores the point that long healthcare/short financials is an idea whose time has come.
Disclosure: The author owns shares of XLF.
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