December is typically a favorable month for owning stocks. The final month of the year brings hopes of Santa Claus rallies, and it sits firmly in the best six-month period for equities. Those are among the reasons why the S&P 500 averages a December gain of 0.6% over the past 20 years.
That's a favorable precedent, but it's not a guarantee of success across all sectors. Before getting into the holiday spirit, investors may want to review the exchange-traded funds (ETFs) they own for potential issues in December.
The Financial Select Sector SPDR ETF (XLF +0.15%), the largest ETF in its category, could prove to be a risky sector fund to own as December progresses. Let's examine why.
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"X" may not mark the spot for this SPDR ETF this month
It is worth noting that while this sector ETF may subject investors to more risk later this month, it has increased by nearly 3% on a month-to-date basis, and December weakness isn't the norm for this fund. To be fair, the ETF averaged a December gain of 1.47% since 2010.
The ETF's recent strength and its December track record support the notion that a bear market is unlikely, nor is the specter of more risk an invitation to short this fund. All that said, some cautionary warnings are necessary when discussing this SPDR ETF.
First, U.S. Bancorp (USB 0.30%) and Moody's (MCO +0.23%) -- two of this ETF's holdings -- often retreat in the second half of December. Over the past decade, these two have been among the worst-performing members of the S&P 500, regardless of sector, in the latter half of December.
NYSEMKT: XLF
Key Data Points
Second, the Federal Reserve just lowered interest rates for a third time. While that's viewed as positive for the broader markets, lower interest rates mean banks are lending at lower rates, and the returns insurance providers generate on collected premiums are pinched. Those are credible risks to this ETF because the fund devotes more than 40% of its roster to bank and insurance stocks.
Third, if consumers rein in holiday spending, this ETF could be pinched. When shoppers feel confident about the economy, they tend to splurge in December, potentially accumulating credit card debt along the way. That isn't good for consumers, but it's positive for this ETF because four of the top five U.S. credit card issuers are among its 10 top holdings. If shoppers don't ring the register this month, that could create some near-term risk for this fund.
Berkshire Hathaway is a wildcard
Confirming this ETF's status as a value fund, Berkshire Hathaway (BRK.B +0.74%) (BRK.A +0.85%) is its largest holding, commanding 11.6% of its weight. That has hampered the ETF's performance this year, as shares of the conglomerate are only 9.21% higher.
With CEO Warren Buffett retiring, changes are afoot at Berkshire. Earlier this week, investment manager and GEICO CEO Todd Combs left the company, one of several pieces in a broader leadership reshuffling.
With Buffett's retirement well telegraphed, changes were expected at Berkshire, and the stock isn't one to bet against over the long term, but if more high-ranking executives depart this month, it could present this sector ETF with added December headwinds.
