Sector Investing

  • 8 May 2020
  • By CME Group

Using Sectors to Identify Opportunities Beneath the Benchmark Index Level:

2019 enjoyed a significant rally for the equity market as the Q4 wobble of 2018 was quickly overcome and we saw the market grind its way up to new all-time highs.  The S&P 500 grew by 28.9% over the course of the year.

Whilst the overall market rallied in 2019, sector performance diverged as investors saw relative value in different industries. Technology was the standout winner, rising by 48%. This sectoral performance far outweighed any other sector’s performance with the next strongest sectors being Communications Services and Financials, which rose 30.1% and 29.8% respectively. The sector which struggled the most in 2019 was Energy which only rose 8% over 2019, as climate change and ESG investing policies resulted in less demand for energy stocks. Indeed, we saw the relationship between oil prices and energy stock prices breakdown further in 2019 as energy stocks underperformed the commodity price.

This dispersion of 40% between the best and worst performing sectors shows how relative sector trading can provide alpha opportunities. This also holds true for overlaying a broader portfolio to increase or decrease exposure to a certain sector. Figure 1 below highlights Select Sector performance for the full year of 2019 as well as showing Q1 2020 performance.

This bull market continued at the start of Q1 2020, reaching new highs as the market overcame concerns on trade war rhetoric that were present for most of 2019 and the global economy’s growth rate combined with central bank policy were viewed as still being accommodative for equities.

However, Q1 2020 witnessed a new concern for the entire globe in the shape of the Coronavirus. As governments enforced shutdowns of their economies in order to slow the spread of the virus, there was the largest demand shock the world has ever encountered as thousands of businesses were shuttered and workers laid off or furloughed.

This resulted in the fastest bear market in the S&P 500’s history and set the tone for a period of sustained and elevated volatility. During Q1 2020 the S&P 500ended up losing 20% overall.

Despite all risk assets selling off simultaneously and correlation initially moving towards 1 as panic set in with investors, over the course of Q1 we saw significant dispersion in sector performances. Investors assessed the impact of the virus on industries and relative winners and losers emerged.

A notable loser remained the Energy sector as global oil prices became depressed by the global demand shock. Energy stocks suffered hugely, and many had to cancel their dividends and preserve cash for their survival, resulting in the sector contracting by a huge 51.3%.

Another sector under severe strain during Q1 was the Financial sector (-32.3%), as interest rates were slashed, hurting banks’ margins and credit conditions were seen deteriorating, resulting in larger potential losses. Similarly, other sectors dependent on global demand underperformed such as Materials and Industrials which declined by 26.7% and 27.4% respectively.

Although still suffering negative performance, relative sector outperformers were Technology (-12.2%), where many companies business models were deemed less sensitive to the demand shock, and perhaps even benefitting from the situation. Defensive sectors such as Healthcare (-13.1%), Consumer Staples (-13.6%) and Utilities (-14.2%) all held up better than some of their sectoral peers.

This period demonstrated again the value of sector investing as one could have employed a relatively market neutral strategy during this period and still generated significant alpha from sectoral relative value trades or protected long portfolios with sector overlays.

As we enter the rest of 2020 and investors assess the ability of economies to recover from the pandemic, the response of Governments and CBs and the ultimate effect upon equity earnings, more opportunities and risks will present themselves. This will not only be in the performance of the outright market but in the relative performance of sectors within major benchmarks. This relative sector performance can be a significant opportunity for alpha generation, especially if the overall market direction is difficult to gauge.

So what sector opportunities and risks may be present in the remainder of 2020?


The Energy Sector has suffered the worst performance amongst the Select Sectors in 2018, 2019 and Q1 2020. In Q1 2020 it has endured a 33% reduction in global oil demand and the outlook remains clouded by the uncertainty surrounding the Coronavirus epidemic, the likely success of any global effort to cut back production and the forecast of when demand for fuel will rebound. It is likely the sector will continue to experience periods of volatility and managing this risk can be achieved by using CME’s Select Sector Future (XAE). This contract saw Q1 2020 growth in average daily volume (ADV) of 83% over FY 2019.


Financial stocks have cut dividends in order to preserve capital ratios as credit quality has deteriorated and going forwards the banks’ margins are likely to remain under pressure given the forecasts for interest rates to be sustained at extremely low levels. Given this, any change in the pace of economic conditions normalising vs. the coronavirus situation persisting, will be important for the sector’s outlook. Clients’ views for Financials can be managed via CME’s Select Sector Financials Future (XAF). Q1 2020, saw more market participants using this product with growth in ADV of 18% over FY 2019.


The Healthcare sector is traditionally viewed as a defensive sector, where earnings are more stable and thus is a sector which clients turn to in periods of uncertainty. However, as all risk assets sold off in March so did the Healthcare sector, but it has quickly recovered most of that lost ground and is not far from its all-time highs. This lack of cyclicality combined with governments globally looking to spend more on healthcare in order to provide relief from the crisis means investors have found relative safety in the sector. Also looking forwards governments are likely to want to be better prepared for any future pandemic episodes. This should help to underpin demand for healthcare solutions and services. This may see more clients rotate into this sector if they believe the broader market will continue to have challenging performance and the demand case for healthcare continues to grow further.  CME’s Select Sector Healthcare Future (XAV), can help clients access this defensive sector. These futures have seen Q1 2020 ADV growth of 18% over FY 2019


The Technology Sector has been the Sector which has led the bull market up over the last few years. This has continued to be the case in 2019 and at the start of 2020. Despite the initial sell off experienced in March as the tech sector was sold due to its high market cap stocks and excellent liquidity profile, the sector quickly was reassessed by investors who recognised that many of the companies in this sector are resilient even in the face of the economic conditions caused by the Coranavirus pandemic. Amazon and Netflix are among several tech names which made new highs in the face of the crisis. Given tech’s dominance over the last few years, optimistic views will be that the sector manages to keep powering ahead in the rest of 2020. Investors can get exposure to Technology stocks via CME’s Select Sector Technology Future (XAT). Indeed Q1 2020 saw more market participants using this product with growth in ADV of 42% over 2019.


Industrial metals prices fell sharply in first four months of 2020 as the global economy fell into a recession that will likely limit demand for housing, consumer goods and other sources of demand for raw materials.  Materials stocks are particularly sensitive to economic conditions in China, which consumes between 40 and 50% of most of the industrial metals and up to two thirds of the world’s iron ore. China’s recovery and in turn it’s dependence on the rest of the globe to generate demand for its goods will determine how the Materials sector recovers in the rest of 2020. As views on this sector fluctuate, clients can manage their risk via CME’s Select Sector Materials future (XAB), which had an ADV growth in Q1 2020 of 10% over 2019.


As factories and offices shutdown amid the Covid-19 pandemic, electrical demand by about 10%.  This affected utility stocks initially, but this demand is expected to normalise as economies start to reopen. Utilities are highly interest rate sensitive.  They typically pay high dividends and are treated by investors as income bearing investments, akin to bonds.  As such, they tend to correlate positively with the prices of US Treasuries and inversely with interest rates.  Provided they can retain their dividend payments Utilities are likely to be sought by income chasing investors as well as seen as a defensive sector. In addition, the lower prices of energy sources such as coal and oil, are likely to benefit utility companies.  Sector exposure can be managed with CME’s Select Sector Utilities future (XAU), which had a Q1 2020 ADV growth of 15% over 2019.

Consumer Stocks:

As unemployment in the US and around the globe has risen sharply due to the epidemic, demand for consumer discretionary stocks has been hit hard. In contrast Consumer Staples have outperformed in the crisis as consumers have stockpiled on basic goods. In the face of any economic rebound and when the crisis dissipates this stockpiling could reduce future demand. Investors view on these two sectors will be dependent on the pace of any economic recovery and how temporary the unemployment situation is. Both the consumer sectors can be risk managed via CME’s Select Sector Consumer Discretionary future (XAY) and CME’s Select Sector Consumer Staples future (XAP), which had Q1 2020 ADV growth of 56% and 50% respectively over 2019.

Real Estate:

The Real Estate sector has been subjected to two opposing forces caused by the crisis. A headwind has been concerns over the demand for office space and especially for commercial space. This has been offset by lower long-term interest rates, boosting the value of future cash flows and any dividends the companies pay out. As investors assess the strengths of these two forces, they can use CME’s Select Sector Real Estate future (XAR) to manage their exposure, which saw a significant increase in activity with Q1 2020 ADV growth of 167% over 2019.


The Coronavirus pandemic has provided alpha generation opportunities between different sectors’ performance and against major index benchmarks. As nations look to exit the crisis and investors assess the scope for a rebound in equity prices and the economy in general, divergent views suggest we will continue to see more rotation between sectors during the rest of 2020. By looking beneath, the S&P 500 index benchmark at Select Sectors, it is possible to identify additional alpha opportunities or run broader portfolios more effectively. At CME Group there are 11 Select Sector Futures available and these provide an effective tool to risk manage sector exposure.

Select Sector

Index Ticker

Futures Ticker

BTIC Block Ticker

Bloomberg Outright

Bloomberg BTIC

Q1-2020 ADVT ($M)

Correlation vs S&P 500 Index (2019 – Full Year)

Communication Services








Consumer Discretionary








Consumer Staples



















Health Care
























Real Estate

























*Source: Bloomberg

Average Daily Volume Traded (ADVT) reflects full year 2019. All other data accurate as of December 31, 2019 unless otherwise specified.

Source: SPDJI Index data.


All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author(s) and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.

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