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With European turmoil hanging over the market and emerging nations casting a shadow over global growth, it hasn’t been a very good time to invest in equity markets. Most global benchmarks are down on the year while a few have managed to tread water despite the economic headwinds. With this backdrop and the uncertainty going forward, few remain fully invested in equities and many are dialing up exposure to bonds and alternative assets in this uncertain time.
Even with these trends, equities have held up reasonably well in the American market over the past few weeks, as some return to the U.S. as a safe haven destination. Yet with the trouble that Europe is facing and the likelihood of a hard landing in China, many are uncertain at best about increasing equity exposure at this time. For these investors, an allocation to low beta sectors could be the way to go, so long as the disorder continues (Play This Top-Ranked Industry With This Sector ETF).
Funds tracking these sectors will often times exhibit greater levels of stability than their more market sensitive counterparts and will usually lose less when the market is crumbling. Just remember that when the market is soaring the opposite happens and these low beta funds will lag their peers. Yet given how the market has performed as of late, this could be an interesting way to go until the market path becomes clearer, suggesting that the following three low beta sector ETFs could be ripe for investment at this time:
iShares Dow Jones US Healthcare ETF (IYH - ETF report) beta of 0.64
Healthcare is usually a low beta pick because individuals need the underlying products of the companies no matter what the economy is doing. This fund seeks to track the Dow Jones U.S. Health Care index which includes companies in the following industries; healthcare equipment and services, pharmaceuticals, and biotechnology. While the fund may invest in all three of these sectors, it is heavily exposed to firms in the big pharma segment as Johnson & Johnson (JNJ - Analyst Report), Pfizer (PFE - Analyst Report), and Merck (MRK - Analyst Report) take the top three spots. Dividends are also pretty good for IYH as the product pays out a little more than 3% a year, more than enough to cover the fund’s 47 basis point expense ratio. In terms of performance, IYH has lost about half a percent this year although it has gained 1.3% in the past three months (see Avoid Turmoil With This Community Bank ETF).
Consumer Staples Select Sector SPDR (XLP - ETF report) beta of 0.58
Much like their counterparts in the healthcare space, consumer staples companies tend to benefit from the necessity of their underlying products. These companies, which sell products like food, cigarettes, and general consumer goods, also tend to have high brand name loyalty and do not see large fluctuations in sales from year to year. Top holdings go towards Procter & Gamble (PG - Analyst Report) and Phillip Morris International (PM - Analyst Report), while a number of retail, beverage, and food companies round out the rest of the top ten. Once again, dividends are pretty solid in this fund, paying out nearly 3% although this product is far cheaper than its iShares health care cousin, charging just 0.2% in fees. However, in terms of return, XLP has done pretty well gaining close to 8.4% on the year and just under 3.6% in the past three month period (read Alternative ETF Weighting Methodologies 101).
Vanguard Utilities ETF (VPU - ETF report) beta of 0.47
Utilities, thanks to their dominance of their respective markets, heavy government regulation, and low growth prospects, are also a popular choice for investors seeking low volatility securities. This fund, which tracks electric, gas, and water utilities, as well as companies that operate as independent producers and/or distributors of power, remains a top choice for those in the market for a utility ETF. The product is pretty well spread out from a top holdings perspective, giving the top weighting to Southern Company (SO - Analyst Report) although each of the top five make up at least 4.25% of total assets. Unsurprisingly, the yield on this fund beats the other sectors, paying out close to 4.2%. Since income is more of a focus than growth, it also allows the product to have one of the lower betas, coming in at just 0.47, among the lowest for a sector ETF. Nevertheless, VPU has still been a stellar performer so far this year, gaining just under 10% since the start of 2011. The last three months have also been quite well, as the product has risen by 3.1% in the time period (read November ETF Asset Report).
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Author is long PM, PFE.