Communications Services Sector ETF XLC Leads S&P 500 in Q1, Despite Weaker Technicals

The Communications Services S&P 500 sector ETF (XLC) led the 11 groups in the first half, while the Information Technology sector was technically the best. Despite a softer greenback, the technicals of the XLB ETF have turned weaker. The rating has been downgraded.

The first half of 2025 saw the Communications Services S&P 500 sector ETF (XLC) emerge as the top performer among the 11 groups, according to recent financial reports. Despite a softer greenback, the technicals of the Materials Select Sector SPDR Fund (NYSEARCA:XLB) have weakened, leading to a downgrade in its rating.

XLC, which seeks to provide exposure to companies in the chemical, construction material, containers and packaging, metals and mining, and paper and forest products industries, has outperformed other sectors. The ETF, which tracks the S&P 500 Materials sector index, allows investors to take strategic or tactical positions at a more targeted level than traditional style-based investing.

However, the Materials Select Sector SPDR Fund (XLB) has underperformed significantly, down 1% since the last summer, underperforming the S&P 500 by a notable 17 percentage points. The valuation situation has not changed much, but the technical situation has deteriorated, with the ETF's shares falling below the falling long-term 200-day moving average (200dma). This technical weakness, combined with the global macroeconomic situation's shaky foundation, has prompted a downgrade to a hold rating.

The key for XLB will be the upcoming earnings season, with the performance of companies like Linde PLC (LIN) and The Sherwin-Williams Company (SHW) critical to its future. Additionally, a weaker US Dollar Index (DXY) would typically help XLB, but this has not been the case in 2025. A potential bounce back in the greenback could lead to significant underperformance for XLB.

Despite these challenges, calendar trends remain bullish, with July often being the second-best month of the year for XLB. The ETF's liquidity remains a bright spot, with average daily volume just shy of six million shares and a tight 30-day median bid/ask spread of a single basis point.

In summary, while the Communications Services S&P 500 sector ETF (XLC) has led the pack in the first half of 2025, the Materials Select Sector SPDR Fund (XLB) has faced technical headwinds and a downgrade in its rating. Investors should monitor the upcoming earnings season and the potential impact of the US Dollar Index on XLB's performance.

References:
[1] https://seekingalpha.com/article/4798683-xlb-technicals-turn-weaker-despite-a-softer-greenback-rating-downgrade
[2] https://www.marketwatch.com/story/communications-services-flat-amid-growth-doubts-communications-services-roundup-17905ec9