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Exchange-traded funds that track various sectors of the

S&P 500

have become such popular investments that it is important to regularly track their performance.

The chart at the bottom of this page shows the expected year-on-year changes in second-quarter earnings for each of nine SPDRs that together represent the spectrum of sectors in this index.

Estimates for second-quarter results indicate that that industrials, health care, and technology-related ETFs were the top-performing sectors for the period.

Industrial Select Sector SPDR

(XLI) - Get Industrial Select Sector SPDR Fund Report

led the sectors in estimated earnings growth, which increased 13.5% compared with the second quarter of 2006. Companies in this ETF are benefiting from a trifecta of economic events: an apparent recovery in domestic manufacturing activity, robust export demand and a weak U.S. dollar.

The last two factors disproportionately benefit the firms represented in this ETF, which get 35% of their sales from abroad -- higher than any other sector except the tech sector's 36%. At 17.3 times this year's EPS, the Industrial Select ETF trades at a slight premium to the market's multiple of 16. F undamentally speaking, however, the wind does appear to be at the backs of industrial companies.

At the opposite end of the growth spectrum is

Consumer Discretionary SPDR

(XLY) - Get Consumer Discretionary Select Sector SPDR Fund Report

, where forecast earnings were down about 7% -- the only sector to show a decline. Weakness is particularly evident in the homebuilders and auto-related companies in the sector.

Retailers, while always a diverse bunch, are expected to be about flat on the whole as good job and wage growth offsets the drag from housing. If that picture isn't bleak enough, consider this: The consumer discretionary fund currently trades at 20.6 times estimated EPS for this year -- only tech has a higher

price-to-earnings ratio -- and estimates have been falling fast.

Meanwhile, the all-important

TheStreet Recommends

Financial Select Sector SPDR

(XLF) - Get Financial Select Sector SPDR Fund Report

ETF is the second-largest estimated earner, even with only 3.6% earnings growth. Earnings have slowed for companies in this ETF as the positive effects of the merger-and-acquisitions boom were diminished by fallout from the subprime mortgage debacle.

Still, I believe the eventual growth number for this ETF could easily double current expectations if the upside surprises of recent quarters are repeated. The sector trades at just 12.3 times the estimated 2007 EPS.

In the

Technology Select Sector SPDR

(XLK) - Get Technology Select Sector SPDR Fund Report

ETF, weakness in semiconductors is weighing on earnings, where estimated second-quarter growth is 7.2%. That's pretty slow for a sector trading at 21 times estimated 2007 EPS.

Were it just a temporary lull, it might be tolerable. But the lackluster growth in tech appears to be the norm in recent years. Since 2002, companies in this ETF have grown earnings at a compound annual rate of 15.1%, barely surpassing the 14.7% growth rate for the more stable S&P 500 as a whole.

Change in Second-Quarter Earnings by Sector (mil)



Energy Select Sector SPDR



(XLE) - Get Energy Select Sector SPDR Fund Report

, which has been the driver behind the S&P's rapid profit growth for years, is stalled with an estimated 2% growth.

Earnings of firms in the

Materials Select Sector SPDR

(XLB) - Get Materials Select Sector SPDR Fund Report

ETF, another cyclical sector, have estimated second-quarter growth of around 4%. But contrast the difference in valuation between these two sectors, where earnings are difficult to predict and are subject primarily to the future direction of commodity prices.

The Energy Select ETF has the lowest P/E ratio of any sector at about 12 times estimated earnings for this year, compared with more than 16 times price/earnings for the Materials ETF.

Recent evidence that the economy may be reaccelerating could make defensive sectors less attractive to investors. The

Consumer Staples Select Sector SPDR's


(XLP) - Get Consumer Staples Select Sector SPDR Fund Report

estimated second-quarter earnings growth is just 1.7%, and it is already trading at a lofty 18.3 times anticipated 2007 EPS.


Utilities Select Sector SPDR

(XLU) - Get Utilities Select Sector SPDR Fund Report

ETF is doing a bit better, with about 5% estimated growth for the quarter. This is despite having more than doubled over the past few years and depressing dividend yields to just 3.0%. That's still the highest of any Sector SPDR, but it nonetheless must compete with 10-year Treasuries now yielding more than 5%.

Finally, the

Health Care Select Sector SPDR

(XLV) - Get Health Care Select Sector SPDR Fund Report

ETF had estimated earnings of a respectable 7.7% for the quarter. The pharmaceutical firms that dominate the index are expected to grow slower, while health care equipment and services firms grow double-digits earnings. This ETF is trading at about 17 times expected full-year earnings, just a slight premium to the market multiple.

P/E Ratio on 2007E EPS


Michael Krause is president and founder of AltaVista Independent Research. AltaVista provides fundamentally driven analysis of exchange-traded funds to help investors select ETFs based on investment merit, much the same way they would evaluate a single stock. The firm offers both print and online ETF research to subscribers, but does not manage clients' money. Mr. Krause is also a frequent contributor to broadcast and print media.