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Jan-26 Outlook

Five Bullish ETFs to Watch This Month

This month's selection of five ETFs—XLU, IJK, XLY, XLE, and DIA—has historically delivered a combined average annualized return of 13% when the predictive indicators discussed below have aligned at current levels or stronger. This analysis draws on approximately 25 years of market data dating back to October 2000.

December's divided Federal Reserve cut rates for the third consecutive time, bringing the federal funds rate to 3.5%–3.75% in a contentious 9-3 vote—the most dissents since 2019. With short-term Treasury yields declining and the Fed signaling a cautious path forward amid sticky inflation and a softening labor market, several interest-rate-sensitive sectors now show favorable technical positioning. These dynamics directly influence the Treasury spreads, rate volatility, and sector momentum indicators featured in this month's analysis.

XLU — Utilities Select Sector SPDR ETF

XLU tracks the S&P 500 Utilities sector, providing exposure to electric utilities, multi-utilities, and independent power producers.

  • Rising short-term Treasury rates: The three-month percentage change in the 3-month Treasury yield stands at 15%, reflecting higher short-term rates. Historically, when this indicator reaches current levels with XLU, the ETF has delivered an annualized return of 17%; when weaker, just 1%. Rising short-term yields often signal expectations for stable monetary policy, which benefits capital-intensive utilities that rely on predictable borrowing costs.
  • Strong equity-bond correlation: The correlation between XLU and the S&P 500 relative to 1-year Treasury movements is running at 42,347% of its historical average, indicating utilities are trading more in lockstep with equities than with bonds. At this level, XLU has historically returned 14% annualized; when lower, 4%. This dynamic suggests investors are treating utilities as equity plays rather than bond proxies, often a sign of confidence in the sector's growth prospects.
  • Subdued financial sector volatility: The three-month standard deviation of the Financial ETF (XLF) sits at 64% of historical norms. With a negative correlation to this metric, XLU has returned 13% annualized when financial volatility remains this contained; when higher, returns averaged -1%. Calm in the financial sector reduces systemic risk concerns, allowing defensive utilities to attract stable inflows.

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

IJK tracks mid-capitalization U.S. equities exhibiting above-average growth characteristics within the S&P MidCap 400 Index.

  • Stable yield curve: The three-month standard deviation of the 10-year minus 3-month Treasury spread (T10Y3M) is at just 2% of historical levels, signaling exceptional stability in the yield curve. When this volatility has been this low, IJK has historically delivered an annualized return of 32%; when higher, 6%. A stable yield curve reduces uncertainty around borrowing costs for growth-oriented mid-cap companies, supporting capital expenditure and expansion plans.
  • Materials sector showing technical weakness: The 14-month Relative Strength Index (RSI) for the Materials ETF (XLB) reads 112%, indicating overbought conditions. Because IJK exhibits a negative correlation to this metric, the mid-cap growth ETF has returned 28% annualized when materials are technically extended; when RSI is lower, 6%. Rotation out of overbought sectors often benefits growth equities as capital seeks less crowded opportunities.
  • Moderate energy performance: The 12-month price change in the Energy ETF (XLE) stands at 4%, a relatively subdued gain. IJK has historically returned 18% annualized when energy momentum is modest; when stronger, 2%. Contained energy prices reduce input costs for many mid-cap companies while signaling measured inflation pressures.

XLY — Consumer Discretionary Select Sector SPDR ETF

XLY tracks the S&P 500 Consumer Discretionary sector, covering retail, automobiles, hotels, restaurants, and leisure.

  • Fed funds rate declining: The prior month's percentage change in the Federal Funds Rate (DFF) was -4%, reflecting the December rate cut. With a negative correlation to this indicator, XLY has delivered 23% annualized returns when rate cuts are occurring; when rates are rising, 7%. Lower borrowing costs reduce financing expenses for big-ticket consumer purchases like automobiles and home furnishings, directly benefiting discretionary spending.
  • Moderate energy prices supporting consumers: The 12-month price change in XLE sits at 4%. When energy gains remain this contained, XLY has historically returned 19% annualized; when energy prices surge, 4%. Lower gasoline and heating costs leave more disposable income for non-essential purchases, a direct tailwind for consumer discretionary companies.
  • Higher long-term yields signaling economic confidence: The 12-month change in the 5-year Treasury yield (DGS5) stands at 36%. Despite the negative correlation, XLY has delivered 15% annualized returns when 5-year yields have risen this much; when lower, -4%. Rising intermediate-term yields often reflect expectations for economic growth, which historically supports consumer spending even as borrowing costs tick higher.

XLE — Energy Select Sector SPDR ETF

XLE tracks the S&P 500 Energy sector, providing concentrated exposure to integrated oil and gas giants like ExxonMobil and Chevron.

  • Fed funds rate mid-range in recent history: The Federal Funds Rate currently sits at 45% of its 52-week peak-to-trough range, indicating rates have retreated from cycle highs but remain elevated. With a negative correlation, XLE has returned 22% annualized when the Fed funds rate occupies this mid-range position; when near peaks, -5%. Energy companies benefit when rate-cutting cycles begin but haven't fully played out, as economic activity remains supported while credit conditions ease.
  • Declining short-term Treasury yields: The prior month's change in the 3-month Treasury yield (WGS3MO) was -6%. At this level, XLE has historically delivered 21% annualized returns; when yields are rising, 5%. Falling short-term rates reduce financing costs for capital-intensive energy projects and signal accommodative monetary conditions ahead.
  • Stable prime rate environment: The six-month standard deviation of the Prime Rate (DPRIME) sits at 41% of historical norms. XLE has returned 20% annualized when prime rate volatility is this contained; when higher, -1%. A predictable lending environment allows energy companies to plan long-cycle investments with greater confidence.

DIA — SPDR Dow Jones Industrial Average ETF

DIA tracks the price-weighted Dow Jones Industrial Average, representing 30 of America's largest blue-chip companies across sectors.

  • Materials sector technically extended: The 14-month RSI for XLB stands at 112%, signaling overbought conditions in basic materials. With a negative correlation, DIA has returned 19% annualized when this RSI reading is this elevated; when lower, 6%. Blue-chip industrials often benefit when rotation flows out of overheated commodity sectors and into established large-cap names.
  • Moderate energy sector momentum: The 12-month price change in XLE stands at 4%. DIA has delivered 12% annualized returns when energy performance is contained; when stronger, 3%. Many Dow components—from Boeing to UnitedHealth—benefit from stable energy input costs, supporting margins across the index.
  • Flat labor force growth: The three-month change in the Civilian Labor Force reads 0%, indicating stable employment participation. DIA has historically returned 11% annualized when labor force growth is flat; when expanding rapidly, 2%. Stable labor conditions suggest neither overheating nor recession, an environment historically favorable for blue-chip earnings stability.

Conclusion

The indicators driving this month's selections share a common thread: rate-sensitive sectors are benefiting from the Fed's pivot toward easing, while technical signals in materials and energy suggest rotation opportunities into growth and consumer-oriented names. With short-term yield volatility contained and the yield curve stabilizing, the backdrop appears constructive for utilities seeking financing, mid-caps planning expansion, and consumers weighing discretionary purchases.

As always, past performance does not guarantee future results, and these indicators reflect historical tendencies rather than certainties. But for investors seeking data-driven entry points, the current alignment of these signals across XLU, IJK, XLY, XLE, and DIA presents a compelling case for the month ahead. Here's to a strong start to the new year—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, December 10, 2025 — federalreserve.gov
  • CNBC, "Fed interest rate decision December 2025" — December 10, 2025
  • Yahoo Finance, FRED Economic Data — December 2025
  • State Street Global Advisors ETF information — ssga.com
  • iShares by BlackRock ETF information — ishares.com