S&P 500 select sector futures were designed to serve as a complementary product to standard and e-mini S&P futures. They can provide an overlaid strategy to S&P positions, and market participants can change the sectors they’re invested in depending on market conditions. Asset managers might want to overweight or underweight different sectors depending on changing levels of volatility or economic uncertainty.
We’re now seeing more interest than ever in fine-tuning exposure to the S&P. In December, we saw a one-day record of 9,636 select sector contracts traded with record open interest over 15,000. This brought to a temporary peak a trend we saw throughout 2012 — average daily volume for select sectors in 2012 was up 126 percent over 2011. Though some of this can be attributed to participants rolling from December to March contracts to maintain their sector positions, there are a few potential reasons for the longer term trend.
Some dividend-paying sectors like utilities picked up in part because of the uncertainty of what the tax structure might look like beginning in 2013. The utility sector makes up just 3.4 percent of the S&P, but the utilities sector futures currently make up more than 10 percent of open interest in our total sector futures products. Materials is another sector showing disproportionate interest in relation to its weight in the S&P. The materials sector is traditionally volatile, and the market uncertainty surrounding the fiscal cliff debates likely added to the volatility.
As we move into 2013 and towards more fiscal certainty, new market forces will emerge, and some rebalancing of exposure through select sectors should help market participants regardless of what those forces are.