In this situation we are feeding three data sets:
- Stock Market Performance (1992 - 1998)
- Wholesale Sales (1992 - 1998)
- Wholesale Inventory (1992 - 1998)
Ideally, model results will be compared with the Consumer Staples Select Sector SPDR ETF's (XLP) average monthly prices from 1992 to 1998 because the model was developed with the ETF using data from 1999 to 2014 but XLP didn't exist until December 1998. Therefore, I will use Fidelity's Select Consumer Staples Portfolio's (FDFAX) average monthly prices which is a mutual fund that has been around since 1985.
FDFAX won't be as great of a fit as XLP but the similarities outweigh the differences:
- Invested in Consumer Staples Industry
- Diversified - Holds many companies
- Open to the general public for share purchase
- Active versus Passive Management
- Benchmarked to different target indices
Let me quickly explain the difference between active and passive management. Active management involves a dedicated team of analysts, managers, and computers that strive for an investment objective. For FDFAX, their goal is to select consumer staples company stocks that will appreciation in value in contrast to a passively managed fund like XLP which simply tracks a consumer staples index.
The potential benefit of active management is investment outperformance relative to an index fund but with two disadvantages. First, the cost is much higher than a passively managed fund. FDFAX's latest prospectus states an annual fee of .79% of assets under management while XLP's is .16% of assets under management. A passively managed fund typically employs a small team of managers and computers. Second, there is a risk of investment underperformance from poor management decisions. One way this can be seen is in increased price volatility. I will explain this further down.
The below chart visually shows prices of FDFAX and XLP. First, you will notice that both funds move in similar directions. This is confirmed with its 94.0% correlation. A 100% correlation means that two variables always move in the same direction.