3 Sector ETFs Braving The Market Slump [Utilities SPDR (ETF), JPMorgan Chase Capital XVI JP Morgan Alerian MLP ETN]

MLPs – JPMorgan Alerian MLP Index ETN (NYSEARCA:AMJ)

Energy MLP ETFs – another rate sensitive zone of the investment world – avoided the rising rate concerns in 2013 pretty well and rewarded investors with a 16% gain. This corner of the market seems poised to continue a decent streak this year as well thanks mainly to consistent growth in the energy industry with new developments in the field of unconventional energy. The recent slide in interest rates has been a boon to the industry.

Investors should also note that MLPs do not pay taxes at the entity level and are thus able to pay out most of their income in the form of dividends. This feature also helped the segment to outperform the boarder market in the current low-yield scenario (read: Direxion Rolls Out High Income MLP ETF).

While a major part of the space has benefited so far this year, we are here to discuss one the biggest products by assets in the space – AMJ.

AMJ – which tracks the Alerian MLP Index – invests about $5.85 billion of assets in 50 holdings. The product charges investors a slightly higher expense ratio of 85 bps per year.

Its yield stands at 4.70% as of February 3, 2014. AMJ returned about 9.6% in 2013 while it has gained 1.05% so far this year.

Mortgage REITs – iShares FTSE NAREIT Mortgage Plus Capped Index Fund (NYSEARCA:REM)

Thanks to declining mortgage rates, mortgage REITs have been on an uphill ride since the start of the year and could be due for some more gains if volatility and fears over stock markets persist and investors flee toward bonds.

30-year and 20-year mortgage rates dropped to 3.55% and 3.29%, respectively. Short-term rates are falling faster than the long-term rates thereby leading to a wide spread and boost higher profits for mREIT companies.

There are three mortgage REIT ETFs currently. Though the trio has seen at least 4% gain thus far in 2014, and REM has led is leading the pack.  REM tracks the FTSE NAREIT All Mortgage Capped Index and invests its $1 billion in assets in its 36 stock portfolio.

The fund has considerable company-specific risks with more than 60% of assets invested in the top-10 holdings. REM charges 48 bps in annual fees which is higher than the other two options – MORL and MORT.

However, yield-starved investors should note that REM yields 15.2% annually (as of February 3, 2014). Though REM lost 2.47% in 2013, it has gained more nearly 5.0% so far this year.

Bottom Line

As one can see in the above chart, SPY, targeting the S&P 500 index, has seen weakness as of late, while XLU, AMJ, REM added 1.97%, 1.27% and 1.00%, respectively, flouting the stock market’s common sentiment.

We believe that this trend will hold up in the coming days at least until the S&P 500 index reaches a compelling valuation. And even if the interest rates start to edge up after that, overall economic growth and demand for energy will be there to back up utilities and MLP funds, though things might not be smooth for mREITs.

Either way though, if rates stay subdued, any of these funds look to be interesting plays for investors in the coming months, and they could definitely continue to match or outperform the S&P 500 too.

This article is brought to you courtesy of Eric Dutram.

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