Manager’s Letter 2017 Q2

July 4, 2017

Sargon Y. Zia, CFA

Chief Investment Officer, Portfolio Manager

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Sector rotation is a normal part of market behavior. But in recent months, it has accelerated to a whipsawing pace. This has not gone unnoticed by the financial media. The online title of a recent CNBC video segment read, “Great time for sector rotation: Expert”. Sure, if you like jumping from one moving roller coaster onto another in mid-ride, then it’s a great time.

“If you like jumping from one moving roller coaster onto another in mid-ride, then it’s a great time.”

Sector funds unbundle a benchmark such as the S&P 500 Index, grouping its companies by major industry into separate sectors. The ten Select Sector SPDR1 ETFs, or “spiders”, are an example.

For simplicity and clarity, let’s focus on the six largest ETFs currently comprising2 about 85% of the benchmark: technology, financials, healthcare, consumer discretionary (or cyclicals), industrials and consumer staples. I’ve excluded utilities, materials, and energy.

Sector Rotation 2017 Q2

These next two slides show sector performance relative to the benchmark S&P 500 Index, comparing the first and second halves of 2017-Q2.

Figure 1 | Source:, as of June 30, 2017

Financials swung from -2.6% in the first half-quarter, to +4.6% in the second relative to the benchmark. In contrast, technology swung from +2.7% to -2.2% relative to the benchmark, just barely outperforming it. This is an instance of sector rotation.

Figure 2 | Source:, as of June 30, 2017

Industrials and healthcare consistently outperformed the benchmark. For the first half of this year, healthcare has outperformed by 7.5%, the best sector so far followed by technology at 5.8%. Financials have underperformed, second only to energy which has underperformed by 21%.

Since June 8, technology has corrected 4.4%, while the S&P has moved sideways. It’s two largest constituents, AAPL and GOOG have corrected a weighted average 7.3%. Sector rotation has become more volatile recently. In the next slide, we animate sector performance relative to the benchmark for the first six months of this year.

Figure 3 | Source:, as of June 30, 2017

“Mismanaging sector allocations can severely affect your portfolio’s risk-adjusted performance.”

At Coherent, we closely monitor sector rotation in the markets, and sector allocations within our portfolios. If and when we tilt sectors, we do so in relatively small measures, seeking ways that are both tax and transaction fee efficient. Mismanaging sector allocations can severely affect your portfolio’s risk-adjusted performance. It’s never a “great time” to risk your investments unwisely.

Happy Fourth!
Sargon Zia, CFA
July 4, 2017

You are welcome to comment!

Recommended Reading:
Earnings Insight May 2017
Manager’s Letter 2017 Q1
Indices, Benchmarks, & Performance

Published quarterly, the Manager’s Letter series primarily communicates the author and Chief Investment Officer’s personal opinion on the markets and other topics of interest to our clients.


  1. State Street Bank and Trust Company serves as administrator and custodian of the Select Sector SPDR Trust. State Street Global Advisors Funds Management, Inc. serves as the Trust’s advisor. SPDR stands for S&P Depository Receipts, often referred to as “spiders”. For more information, see
  2. The ten Select Sector SPDR ETFs in order from largest to smallest weighting in the S&P 500 Index currently are: XLK 24%, XLF 15%, XLV 14%, XLY 12%, XLI 10%, XLP 9%, XLE 6%, XLU 3%, XLRE 3%, and XLB 3%.


We look forward to discussing your unique financial goals and personal values!

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