TrendWell Digest: February 2026 ETF Picks

The Federal Reserve held rates steady at 3.5–3.75% at its January meeting, pausing after three consecutive cuts in late 2025. With unemployment stabilizing near 4.6%, inflation cooling to 2.7%, and Treasury yields down sharply year-over-year—the 5-year Treasury rate has fallen 49%—conditions are aligning for a diverse mix of equity exposures heading into February. Materials sector volatility has reached elevated levels poised to normalize, while defensive sectors show muted gains signaling healthy risk appetite. Based on nearly 25 years of historical data (back to October 2000), when all three predictive drivers for each ETF have aligned as they do now, this group has delivered an average annualized return of 14%.

SPY — SPDR S&P 500 ETF Trust

SPY tracks the S&P 500 Index, providing broad exposure to large-cap U.S. equities.

• Materials volatility peaking: The 14-month Relative Strength Index (RSI) of XLB (Materials Select Sector) volatility sits at 121% of historical levels—overbought territory that typically precedes mean reversion. When commodity-linked volatility is this elevated and poised to cool, broad equity markets tend to stabilize and rally. When XLB RSI has reached these levels, SPY has averaged 22% annualized; when lower, just 5%.
• Consumer staples showing modest gains: The six-month change in XLP (Consumer Staples) is up only 4%. Muted staples performance signals that investors aren't hiding in defensive sectors—a bullish sign for broad market risk appetite. When XLP six-month gains have been this subdued, SPY has returned 14% annualized versus 1% otherwise.
• Treasury yields falling sharply: The 5-year Treasury rate (DGS5) has declined 49% over the past twelve months, reflecting aggressive Fed easing in 2025 and flight-to-safety flows reversing. Falling yields reduce the opportunity cost of holding equities. When DGS5 has dropped this much, SPY has averaged 13% annualized, compared to 6% when yields were stable or rising.

IJR — iShares Core S&P Small-Cap 600 ETF

IJR tracks the S&P Small-Cap 600 Index, offering exposure to smaller U.S. companies with growth potential.

• Materials volatility peaking: The 14-month RSI of XLB volatility at 121% signals overbought conditions in commodity-driven sectors. Small caps often outperform when materials volatility normalizes, as input cost uncertainty diminishes. When XLB RSI has been this elevated, IJR has delivered 24% annualized; when lower, 7%.
• Fed rate cuts still flowing through: The prior month's change in the effective federal funds rate (DFF) fell 2%, reflecting the cumulative impact of 2025's easing cycle. Small caps are particularly sensitive to borrowing costs, making lower rates a direct tailwind for balance sheets and expansion plans. When DFF has declined this much, IJR has averaged 19% annualized versus 7% otherwise.
• Energy sector gains contained: The twelve-month price change in XLE (Energy Select Sector) is up 16%—positive but not excessive. Moderate energy gains keep fuel and input costs manageable for small businesses without signaling inflationary overheating. When XLE gains have been this restrained, IJR has returned 17% annualized, compared to -1% when energy ran hotter.

IJJ — iShares S&P Mid-Cap 400 Value ETF

IJJ tracks mid-cap U.S. value stocks, blending the size premium of mid-caps with value-factor exposure.

• Stable unemployment trends: The three-month change in the unemployment rate (LNU01300000) is flat at 0%. Despite unemployment settling near 4.6%, the rate has stabilized—providing confidence for cyclical mid-cap value names tied to consumer spending and business investment. When unemployment has held steady, IJJ has averaged 29% annualized versus 3% when rising.
• Materials volatility peaking: The 14-month RSI of XLB volatility at 121% suggests commodity-sector turbulence is due to subside. Mid-cap value companies, often with exposure to industrials and materials, benefit when this volatility normalizes. When XLB RSI has reached these levels, IJJ has returned 21% annualized, compared to 8% when lower.
• Energy sector gains contained: The twelve-month price change in XLE at 16% represents moderate rather than runaway gains. Contained energy prices support profit margins for value-oriented industrials and manufacturers. When XLE gains have been this restrained, IJJ has averaged 16% annualized versus 0% when energy surged further.

IJK — iShares S&P Mid-Cap 400 Growth ETF

IJK tracks mid-cap U.S. growth companies, offering exposure to firms in the expansion phase of their business cycle.

• Consumer staples showing modest gains: The six-month change in XLP is up only 4%. When defensive staples underperform, capital rotates toward growth-oriented sectors. This signals investor confidence in economic expansion rather than defensive positioning. When XLP six-month gains have been this muted, IJK has delivered 17% annualized; when higher, -1%.
• Small-cap volatility elevated: The twelve-month standard deviation of IJR sits at 81% of historical levels—moderately elevated but not extreme. Heightened small-cap volatility often precedes rotation into mid-cap growth as investors seek a balance of upside and stability. When IJR volatility has been at this level or higher, IJK has averaged 12% annualized versus 3% otherwise.
• Short-term rates declining: The three-month change in the 1-year Treasury bill rate (DTB1YR) is down 20%, reflecting 2025's Fed easing flowing through to short-term markets. Lower short-term rates reduce financing costs for growth companies investing in expansion. When DTB1YR has declined this much, IJK has returned 10% annualized, compared to 8% when rates were flat or rising.

XLF — Financial Select Sector SPDR Fund

XLF tracks the S&P Financial Select Sector Index, including banks, insurance companies, and diversified financial services firms.

• Emerging market volatility elevated: The twelve-month standard deviation of emerging market equities (WLEMUINDXD) sits at 125% of historical levels. Elevated EM volatility often drives capital back to U.S. financial institutions perceived as safer and more stable. When EM volatility has been this high, XLF has averaged 23% annualized; when calmer, just 3%.
• Short-term Treasury rates plunging: The six-month change in the 3-month Treasury rate (WGS3MO) is down 126%—a dramatic decline reflecting the Fed's aggressive easing in 2025. A steepening yield curve (short rates falling faster than long rates) benefits bank net interest margins. When WGS3MO has declined this sharply, XLF has returned 20% annualized versus 2% otherwise.
• Intermediate-term yields falling: The twelve-month change in the 5-year Treasury rate (DGS5) is down 49%. While this compresses some spread income, it also signals a supportive Fed and reduced recession fears—both positives for financial sector sentiment. When DGS5 has dropped this much, XLF has averaged 15% annualized, compared to -4% when yields were stable or rising.

Conclusion

The convergence of declining interest rates across the yield curve, stable unemployment, and peaking materials sector volatility creates a supportive backdrop for February's ETF picks. With the Fed pausing to assess conditions and Treasury yields reflecting the cumulative impact of 2025's easing cycle, both broad market exposure through SPY and targeted plays in small-cap, mid-cap, and financials appear well-positioned. The data suggests this is a favorable environment for equities benefiting from rate relief, normalized volatility, and a stabilizing labor market—and we hope your portfolio continues to TrendWell.

This article is for informational purposes only and does not constitute financial advice.

Sources:

• Federal Reserve FOMC Statement, January 28, 2026 (federalreserve.gov)
• CNBC, "Fed rate decision January 2026: Holds key rate steady," January 28, 2026 (cnbc.com)
• J.P. Morgan, "Fed Leaves Rates Unchanged to Start 2026," January 2026 (jpmorgan.com)
• Morningstar, "Is the Economy Improving Heading Into 2026?" December 2025 (morningstar.com)