2 Sector ETFs to Keep an Eye on in 2023

The stock market was on a wild ride last year due to the double whammy of skyrocketing inflation and the Fed’s interest rate hikes, coupled with geopolitical tensions. However, a series of recent positive economic data boosted investors’ confidence.

Inflation fell for the sixth consecutive month to 6.5% in December, bolstering hopes of a soft landing among investors and smaller interest rate hikes by the Federal Reserve going forward. Despite the steady waning, the central bank remains committed to bringing inflation down to its 2% target, implying more interest rate hikes this year.

Many economists believe the Fed’s aggressive regime has triggered a broader slowdown in the economy, predicting a 61% chance of a recession in 2023. This is expected to keep the stock market under pressure this year.

Irrespective of the market conditions, Exchange-Traded Funds (ETFs) can be useful for investors who are unsure of which individual stocks to buy, as they cover a basket of securities, thereby mitigating risk while enjoying broad upside opportunities at a low price.

Two ETFs that investors should keep an eye on in 2023 are the Health Care Select Sector SPDR Fund (XLV) and Energy Select Sector SPDR Fund (XLE). These ETFs’ diverse holdings could help investors generate substantial returns.

Health Care Select Sector SPDR Fund (XLV)

XLV invests in stocks of companies operating across healthcare sectors in the United States and growth and value stocks of companies across diversified market capitalization. It seeks to track the performance of publicly traded equity securities of companies in the Health Care Select Sector Index by using the full replication technique.

As of January 23, XLV has $41.46 billion in assets under management (AUM) management and a Net Asset Value (NAV) of $134.38. Its expense ratio of 0.10% is lower than the category average of 0.53%.

The fund’s top holdings include UnitedHealth Group Inc (UNH) with a 9.05% weight, Johnson & Johnson (JNJ) with an 8.86% weight, and Merck & Co., Inc. (MRK) with a 5.57% weight. It has a total of 65 holdings.

XLV’s annual dividend of $1.99 yields 1.48% on prevailing prices. Its dividend payouts have increased at an 8.9% CAGR over the past three years and a 10.4% CAGR over the past five years. The ETF has a four-year average yield of 1.67%.

The fund’s net inflows came in at $6.51 billion over the past year. XLV has gained 6.2% over the past three months and 3.8% over the past year to close the last trading session at $134.37. It has a five-year beta of 0.69.

XLV’s solid prospects are reflected in its POWR Ratings. The ETF has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

The ETF has an A grade for Trade and Buy & Hold. Among the 42 ETFs in the B-rated Health & Biotech ETFs group, XLV is ranked first. To see XLV’s rating for Peer, click here.

Energy Select Sector SPDR Fund (XLE)

XLE aims to provide before-expenses investment results that correspond with the price and yield performance of the Energy Select Sector Index companies. The fund follows a replication strategy and offers exposure to the U.S. energy sector.

As of January 23, XLE has a $42.52 billion AUM and a NAV of $90.55. Its expense ratio of 0.10% compares to the category average of 0.46%. The fund’s top holdings include Exxon Mobil Corporation (XOM) with a 22.56% weight, Chevron Corporation (CVX) with a 19.51% weight, Schlumberger Limited (SLB) with a 5.02% weight, and ConocoPhillips (COP) with a 4.46% weight.

XLE’s annual dividend of $3.22 yields 3.56% on prevailing prices. Its dividend payouts have increased at a 12.8% CAGR over the past three years and an 8% CAGR over the past five years. The fund has a four-year average yield of 5.54%.

Over the past month, the fund’s net inflow came in at $881.45 million. XLE has gained 45.1% over the past year to close its last trading session at $90.60. It has a five-year beta of 1.50.

XLE’s strong fundamentals are reflected in its POWR Ratings. The ETF has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.

It has a Trade, Buy & Hold, and Peer grade of A. In the 46-fund B-rated Energy Equities ETFs group, it is ranked #1. Click here to see all POWR Ratings for XLE.

XLV shares were trading at $133.23 per share on Tuesday afternoon, down $1.14 (-0.85%). Year-to-date, XLV has declined -1.93%, versus a 4.73% rise in the benchmark S&P 500 index during the same period.

Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.

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