How Traders Use Sector SPDRs to Their Advantage

Index trading is a popular way to gain exposure to an entire economy or specific sectors. Among the indices worldwide, the S&P 500 is one of the most sought after. It covers 11 sectors of the US economy, including Information Technology, Healthcare, Financials, Consumer Discretionary, Communication Services, Industrials, Consumer Staples, Energy, Utilities, Real Estate, and Materials. But how do you keep track of so many sectors to make informed trading decisions? This is where SPDRs come to the rescue.

Here’s a closer look at SPDRs and how they can help you with index trading.

What are Sector SPDRs?

Standard & Poor’s Depository Receipts (SPDRs) are ETFs that track the S&P 500 index. Each SPDR ETF follows a specific sector covered by the index. For instance, the SPDR ETF XLK tracks the technology stocks on the S&P 500, while XLC tracks communication services, XLY tracks consumer discretionary, XLE is for energy, XLF for finance and so on. Plus, the SPY tracks the overall index. 

Simply put, sector SPDRs replicate the performance of a particular sector covered by the S&P 500, offering investors a way to track that sector’s performance. This can help you make decisions regarding the buying and selling of individual stocks from the specific sector or identify what position to take on the overall index.

For example, the technology sector accounts for 33.7% of the stocks on the S&P 500. Therefore, the performance of the tech sector is likely to move the entire index. We saw an example of this after Meta Platforms and Microsoft released beat Q1 2025 earnings. The stocks rose as a result, leading the S&P 500 to rise by 0.15% by market close on April 30, 2025.

Making Trading Decisions Based on SPDR Performance

An SPDR tracker tells you how each ETF is performing. You can choose the timeframe for which you wish to view the SPDR’s performance, such as daily, weekly, monthly and so on. 

Source: Select Sector SPDRs

Information regarding the performance of your preferred sectors can help you decide on the type of position to open. For example, if the technology sector is performing well, traders could either choose to open a long position in individual stocks in the sector, such as Nvidia, Apple, Microsoft, etc., or in a tech-heavy index like the Nasdaq 100.

On the other hand, trading via derivative instruments, such as contracts for difference (CFDs), allows you to speculate on both outperformance and underperformance. For instance, the SPDR tracker shows that the communication services sector, which accounts for 14.1% of the S&P 500, is underperforming, you could choose to open a short contract on the index. Mega cap stocks, such as Alphabet and Comcast, from the communication services sector could influence the overall performance of the index.

However, remember that information on SPDRs alone is not enough to make informed trading decisions. You need to conduct your own research and analysis, while also considering your risk tolerance. In addition, include appropriate risk management measures in your trading strategy to limit losses, in case the market moves unfavourably.

Technical analysis is important to identify trading opportunities and determine entry and exit positions.

Top 3 Technical Indicators to Support SPDR Information

Technical indicators analyse historical price and volume data to identify potential trends, support and resistance levels, and momentum. By analysing charts and indicators, traders can develop strategies for entering and exiting positions and managing risk. Here’s a look at the most popular indicators for index and stock trading decisions.

Moving Average Convergence Divergence

MACD is a trend and momentum indicator used to identify potential changes in the trend’s direction, strength and momentum. It plots the difference between the MACD line (12-day EMA minus 26-day EMA) and the signal line (the MACD line’s 9-day EMA). When the MACD line is above the zero line, it suggests bullish momentum, while a line below zero indicates bearish momentum. Crossovers of the MACD and signal lines can indicate potential entry or exit points. For example, a buy signal is generated when the MACD line crosses above the signal line.

Divergence between the price action and the MACD can indicate potential trend reversals or exhaustion. For example, if the price makes a new high but the MACD does not, it could suggest the weakening of an ongoing upward trend. 

Relative Strength Index

RSI is a momentum indicator that oscillates on a scale of 0 to 100. It provides insights into whether an asset is overbought or oversold. This helps traders assess whether the price is likely to see a pullback (if the asset is becoming overbought) or to surge (during oversold markets). RSI values above 70 generally indicate an overbought condition, suggesting a potential pullback or selling opportunity. Conversely, RSI values below 30 generally indicate an oversold condition, suggesting a potential bounce or buying opportunity.

Traders use this indicator to identify potential trend reversals or to confirm a trend, making it a valuable tool for timing market entries and exits. However, RSI is most effective when used in conjunction with other technical indicators, since it can produce false signals.

Bollinger Bands

Bollinger Bands are used to assess price volatility and potential reversals. The indicator consists of three bands: a middle band (typically a simple moving average), an upper band (SMA + standard deviation), and a lower band (SMA – standard deviation). The distance between the upper and lower bands indicates the level of volatility. Widening distance between the two bands indicates rising volatility and vice versa. The bands can also act as dynamic support and resistance levels, suggesting potential price reversal points. 

Bollinger Bands are also used to evaluate overbought and oversold conditions. When the price moves far above the upper band, it suggests an overbought condition and a potential price reversal downwards. Conversely, when the price moves far below the lower band, it suggests an oversold condition and a potential price reversal upwards.

Some of the other popular technical indicators include:

• Fibonacci Retracement Levels: Used to identify potential support and resistance levels based on retracement percentages.
• On-Balance Volume: Used to identify buying or selling pressure based on trading volumes.
• Average Directional Index: Used to identify trend strength and momentum.

To Sum Up

• SPDRs are ETFs that track the performance of different sectors included in the S&P 500.
• SPY is an SPDR ETF that attempts to replicate the performance of the overall index.
• Traders can follow the performance of the SPDR of their preferred sectors to make trading decisions.
• SPDR performance isn’t sufficient for informed trading decisions.
• Technical analysis and risk management are important.
• Popular technical indicators used for stock and index trading decisions include MACD, RSI and Bollinger Bands.

Disclaimer:

All data, information and materials are published and provided “as is” solely for informational purposes only, and is not intended nor should be considered, in any way, as investment advice, recommendations, and/or suggestions for performing any actions with financial instruments. The information and opinions presented do not take into account any particular individual’s investment objectives, financial situation or needs, and hence does not constitute as an advice or a recommendation with respect to any investment product. All investors should seek advice from certified financial advisors based on their unique situation before making any investment decisions in accordance to their personal risk appetite. Blackwell Global endeavours to ensure that the information provided is complete and correct, but make no representation as to the actuality, accuracy or completeness of the information. Information, data and opinions may change without notice and Blackwell Global is not obliged to update on the changes. The opinions and views expressed are solely those of the authors and analysts and do not necessarily represent that of Blackwell Global or its management, shareholders, and affiliates. Any projections or views of the market provided may not prove to be accurate. Past performance is not necessarily an indicative of future performance. Blackwell Global assumes no liability for any loss arising directly or indirectly from use of or reliance on such information here in contained. Reproduction of this information, in whole or in part, is not permitted.