3 Sector ETFs Outpacing Larger Rivals

Sectors lead the broader market, not the other way around. With U.S. stocks flirting with all-time highs, it is a good idea to identify leaders and laggards at the sector level. This exercise is also an excellent way for investors to take part in the ongoing debate about large ETFs and their often noticeable inability to outperform smaller equivalents.

Using the nine State Street Global Advisors Select Sector SPDRs as the measuring tools, investors will see that in terms of year-to-date returns, the Health Care Select Sector SPDR (NYSE:XLV) and the Consumer Staples Select Sector SPDR (NYSE:XLP) are the best year-to-date performers with gains of 11.3 and 10.7 percent, respectively, according to ETF Replay data.

The SPDR laggards are the Materials Select Sector SPDR (NYSE:XLB) and the Technology Select Sector (NYSE:XLK) with returns of 3.4 and 4.6 percent, respectively. With those returns in mind, here are some of the sector ETFs that have been outperforming their SPDRs rivals in 2013.

First Trust Energy AlphaDEX Fund (NYSE:FXN) In addition to health care and staples, energy has shown strong sector leadership to start 2013. Helped in large part by its 15 percent weight to Chevron (NYSE:CVX), which is up 9.6 percent year-to-date, the Energy Select Sector SPDR (NYSE:XLE) has gained nearly 9.3 percent since the start of the year.

Gaining 9.3 percent in just over two months is a return that most investors would not scoff at, but the First Trust Energy AlphaDEX Fund has done better. Try 100 basis points better. As is the case with the other AlphaDEX sector funds, is not a traditional market capitalization-weighted ETF. Rather, FXN holdings are selected based on growth factors such as price appreciation and value factors such as return on assets.

The result is an energy fund that is not excessively weighted to Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) as XLE. In fact, Hess (NYSE:HES) is FXN's largest holding with a weight of less than four percent. Now the question is can FXN outperform XLE and related ETFs for the rest of the year? The answer is "yes" if refiners such as Phillips 66 (NYSE:PSX) and oil services names, a group that FXN is significantly more exposed to than XLE, continue soaring.

Guggenheim S&P 500 Equal Weight Technology ETF (NYSE:RYT) The inclusion of the Guggenheim S&P 500 Equal Weight Technology ETF on this probably will not surprise those investors (practically everyone) that have heard about Apple's (NASDAQ:AAPL) stunning fall from grace. To review, Apple's run to the stratosphere last year meant the stock started dominating cap-weighted technology sector ETFs.

That was nice on the way up, but far from pleasant on the way down. Apple's dramatically declining market value has trimmed its weight in XLK to 13.7 percent. Still, that is nearly 600 basis points higher than Google's (NASDAQ:GOOG) weight within the fund.

Long story short, XLK is up just 4.6 percent this year, telling some investors that perhaps tech is being left behind in this rally. Not really, RYT is almost 9.8 percent. The difference? Apple is RYT's second-smallest holding with an allocation of just 1.09 percent.

First Trust Health Care AlphaDEX Fund (NYSE:FXH) As was noted earlier, the Health Care Select Sector SPDR has been a stellar performer this year and it is unlikely most investors would quibble about earning 11.3 percent in just over two months. For the moment, it is hard to criticize XLV beyond the fact that three stocks - Johnson & Johnson (NYSE:JNJ), Pfizer (NYSE:PFE) and Merck (NYSE:MRK) - combine for about a third of the ETF's weight.

The First Trust Health Care AlphaDEX Fund takes a much different approach to this sector. Pharmaceuticals names account for just 9.4 percent of FXH's weight, but health care provides and equipment makers combine for 61 percent. Top holdings include Tenet Healthcare (NYSE:THC), DaVita (NYSE:DVA) and WellPoint (NYSE:WLP).

Two knocks on FXH: Its expense ratio of 0.7 percent is far higher than XLV's and some other health care ETFs. Second, FXH's three-year standard deviation is about 250 basis points higher than the S&P 500 Health Care Index, according to First Trust data. In favor FXH, it has a higher Sharpe ratio than the aforementioned index and has outperformed XLV this year, over the past year and over the past five years. For more on ETFs, click here.