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Thanks to the last-minute deal and a string of earnings beat, the stock market is once again hitting multi-year highs. The surprise taper delay by the Fed in September and growing speculation of continued ‘taper hold’ at least for the near term are also driving markets higher.
Though the U.S. ended its first 16-day shutdown since the mid 90s and avoided debt default for the time being, economic uncertainties linger worldwide. This is especially true since a long-term deal was not reached, thereby raising changes of another shutdown in mid-January 2014 and a next debt ceiling debacle in February.
Given this, it seems reasonable to assume that another bout of volatility may be just around the corner (read: 3 Safe ETFs to Buy in the Next Shutdown). Further, sluggish U.S. economic data of late such as weak consumer confidence, uncertain manufacturing sector, and a low level of job creation, suggests that the bullish run might not continue for long.
This perception is turning some investors cautious and compelling them to tilt their portfolios towardsdefensive sectors like healthcare, consumer staples and utilities.
The Defensive sectors generally act as a safe haven during any turmoil. . Stocks in these sectors generally provide higher returns during troubled times (read: 3 Top Ranked ETFs from Red Hot Sectors).
Let us have a look at some of these ETFs that can protect portfolios in sluggish markets and could be a worthwhile for investors as we move ahead into the New Year (see: all the Categories ETF here).
Vanguard Utilities ETF (VPU)
After being stressed by rising interest rate speculations over the past couple of months, the utility sector is back on track following the Fed’s ‘no taper’ shocker. Additionally, the sector has not disappointed this earnings season and is showing improvement.
As per the Zacks Earnings Trends, utility sector earnings are up 4.1% with earnings beat ratio of 80% so far in Q3 compared to 0.7% decline in Q2. Further, it is the only sector expected to generate triple-digit earnings growth in the fourth quarter. The sector is poised to benefit from the ever-expanding population, which would fuel demand for essential utility supplies like water, gas and electricity.
One way to play this strong trend in the sector is with VPU. It is one of the popular and liquid ETFs with AUM of nearly $1.4 billion and average daily volume of 131,000 shares a day. The fund tracks the MSCI US Investable Market Utilities 25/50 Index, holding 79 stocks in the basket (read: Utility ETFs: Winners After the No Taper Announcement?).
More than half of the portfolio is allocated to electric utilities, closely followed by multi utilities (33%). Gas, water and other utilities make up for small chunks in the basket. In terms of individual holdings, the product puts nearly 47% of total assets in the top 10 holdings, suggesting moderate concentration. The fund primarily focuses on large caps (69%) and mid caps (23%) while has a certain tilt toward value stocks.
The ETF charges 14 bps in annual fees. The product added about 5% over the trailing one-month period and nearly 17% in the year-to-date time period. It has a decent Zacks ETF Rank of 3 or ‘Hold’ with a ‘Medium’ risk outlook.
Health Care Select Sector SPDR Fund (XLV)
The healthcare space is outperforming the broad market this year thanks to strength in biotechnology and pharmaceuticals firms. This is primarily attributable to increased mergers and acquisitions, promising new drugs and their approval, ever-increasing healthcare spending, an insatiable demand for new drugs, and growing demand in emerging markets.
Investors could tap this growing sector with State Street’s XLV, which provides broad exposure to the healthcare world. The fund has accumulated nearly $8 billion in AUM and sees heavy volume of more than 7.5 million shares per day. The ETF has one of the lowest expense ratios of 0.18%.
Holding 57 securities, the product is heavily concentrated in its top 10 holdings with Johnson & Johnson (12.76%) and Pfizer (9.94%) dominating the fund’s return. This is a large cap centric fund. Pharmaceuticals take the top spot at 45.26%, while biotechnology (18.87%), equipment and supplies (15.71%), and providers and services (15.51%) round off to the next three spots (read: Inside Biotech ETFs: Can the Run Continue?).
The fund added 4% over the past month and is up 34% year-to-date. The ETF currently has Zacks ETF rank of 2 or ‘Buy’ rating with a ‘Low’ risk outlook.
Guggenheim S&P Equal Weight Consumer Staples ETF (RHS)
The consumer staples sector appears to be defensive as it includes a variety of items like food & beverages, non-durable household goods, hypermarkets and consumer supercenters that are essential for daily needs. These products see steady demand even during an economic downturn due to their low level of correlation with economic cycles.
One great way to play this sector is the RHS. This fund tracks the S&P Equal Weight Consumer Staples Index, which means that the fund gives every stock the same weight in the benchmark, irrespective of market capitalization levels (read: Overweight These Equal Weight ETFs in Your Portfolio).
The product offers a radically different approach to the space, as no one firm accounts for more than 3.08% of assets. Though the fund focuses more on large caps at 80%, it provides a nice mix of growth, value and blend securities. In terms of industrial exposure, the ETF has a slight tilt toward food products with 31.71% share, closely followed by beverages (22.44%) and food & staples retailing (20.68%).
This technique hasn’t caught on too much in the staples market, as the ETF has just $79.3 million in assets and sees about 12,000 shares in volume a day. The expense ratio is a little high at 50 basis points a year. RHS added over 5% over the trailing one month and is up nearly 29% so far this year. The fund has a Zacks ETF Rank of 2 or ‘Buy’ rating with a ‘Medium’ risk outlook.
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