While many believed that the escalation of the Fed QE taper will result in rising rates, the market proved exactly the opposite, as risk-adverse investors flocked to safe-haven U.S. government debt.
The escape to safety came in the wake of massive sell-offs in U.S. stocks. An emerging market lull, a weak U.S. job scene and manufacturing data as well as the slowdown in the world’s second largest economy– China – all led the S&P 500 index to witness the worst decline in almost two years.
Moreover, we believe that over-valuation, profit booking activities and sub-par guidance from companies are causing corrections in the markets.
While the overall stock market is going through a rough phase currently, as evident by roughly 5% loss incurred by the SPDR S&P 500 ETF (SPY) in the year-to-date frame, there are a few segments which have stayed in the green. This is especially true in the rate-sensitive sectors, as these have been the clear winners in this falling rate environment.
Below are three ETFs surviving the broader market slump, and are likely to benefit if the interest rates stay subdued in the near term:
Utilities – Utilities Select Sector SPDR ETF (NYSEARCA:XLU)
Being a high yield and safe sector, utilities started the year on a strong footing. The sector satisfies both the criteria investors are currently looking for. One of these is yield (as yields out of U.S. treasury bonds are sinking now) and the other is a safer option for investment.
Operating environment is also in favor of the utility sector. As the utility sector requires huge infrastructure which places a massive debt burden and the resultant interest obligation on these companies, the companies tend to outperform when rates are low in the economy.
Secondly, barring some occasional downbeat data, the overall growth of the U.S. economy remains pretty assuring. And higher infrastructural investment is warranted in a growing economy (read: A Comprehensive Guide to Utility ETFs).
The sector is not meant for those who expect huge market-beating returns. It is among the most stable sectors for a long haul and the companies in this space are likely to be decent investments.
XLU is a big winner in this space and by far the most popular choice in the utilities space. The fund tracks the S&P Utilities Select Sector Index. The product has roughly $5.07 billion in AUM and trades about 10,500,000 in volume a day, while its cost is just 16 basis points a year.
Holding 32 securities in its basket, the product is largely concentrated in the top 10 holdings with less than 60% of share. Its top three holdings account for one-fourth of the portfolio.
In terms of performance, the product generated about 13% last year and has returned nearly 3.7% year to date. XLU gives about 3.75% in yield.