2014 has so far been event driven. Record chills in the U.S. plagued the stock markets as the year unfolded with a pack of downbeat U.S. economic indicators. As spring set in and investors seemed comforted by some assuring data, the standoff between Russia and the West on the Ukrainian issue again rendered a blow to the stock market.
The much-awaited and much-talked about gradual unwinding of QE stimulus was already in place. The persistent concerns about a possible slowdown in China, which is the world’s second largest economy, a relatively weak Japanese economy and deflationary worries in Europe added to the woes. All these suddenly raised the appeal for defensive stock investing.
Among a handful of defensive sectors, utilities held up quite well this year with SPDR Utilities Select Sector ETF (NYSEARCA:XLU) breezing past SPDR S&P500 ETF (NYSEARCA:SPY). Normally, the utility sector is loved by risk-averse investors thanks to its regulated nature of operations and steady return to shareholders. Though it lacks the ability to skyrocket in boom times, the sector comes across as a safe bet in a rocky environment.
However, no roses are without thorns. Even the utility sector has some shortcomings. As utilities stocks require huge infrastructure, which creates a massive debt burden and the resultant interest obligation on these companies, these stocks can perform poorly in a rising rate environment (read: The Comprehensive Guide to Utility ETFs).
With the U.S. economy fast approaching an era which will be devoid of quantitative easing, a rising rate issue will be looming large. Thus, it would be prudent to pick a potential ETF winner from the infrastructure pack that is likely to see huge demand, be less vulnerable to rate issues, and strike a nice balance between value and growth stocks as well as large and small caps.
Demand-wise, companies involved in energy infrastructure should do well ahead as the global economy has been on an uptrend since the middle of last year boosting the energy requirement. Thus, to pick an energy infrastructure ETF, investors can look at the Zacks ETF Rank and find the top ETFs in the sector.
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box or asset class. Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while they also receive one of three risk ratings, namely Low, Medium or High.
The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of the five ranks within each risk bucket. Thus, the Zacks ETF Rank reflects the expected return of an ETF relative to other products with a similar level of risk.
For investors seeking to apply this methodology to their portfolio in the utility space, we have taken a closer look at the top ranked GRID. This ETF has a Zacks ETF Rank of 2 or ‘Buy’ rating (see the full list of top ranked ETFs) and is detailed below: