After a tremendous stock market rally in 2013, risk-off trade sentiment has taken the front seat in 2014. Nagging geo-political risks related to the Ukraine and Russia issue, Fed’s gradual withdrawal of bond buying activity, exorbitant valuation of the stock markets and overall profit booking activity has resulted in recent market gyrations.
Stocks have begun to reflect this pessimism as of late while many portfolio managers and analysts have become increasingly bearish in recent weeks. These issues were compounded by the slowdown in the world’s second largest economy, China, concerns of deflation in Euro zone and a weaker-than-expected showing by Japan.
As a result, high growth and high beta stocks saw dire trading with investors fleeing risky assets classes in search of safe havens. Tech and biotech stocks were literally trashed and this had a ripple effect on the other sectors too.
The S&P 500 was down more than 2% in the past month. Yet there were some market winners (though by small margins). In fact, some conventionally secure and recession proof sectors like utilities and consumer staples significantly outperformed the broader market so far in 2014. Notably, these two sectors are commonly known as defensive sectors.
Below, we highlight two defensive sector ETFs that held up well in this bear market and could be worth a closer look if the selling pressure persists:
Being a very safe sector, utilities started the year on a strong footing. The sector is a great investment for those who look for yields and safety. The sector is not meant for those who expect market-beating returns. It is among the most stable sectors over the long haul and the companies in this space are likely to be decent investments (read: The Comprehensive Guide to Utility ETFs ).
The sector is highly dependent on interest rate policy as it requires huge infrastructure which places a massive debt burden and the resultant interest obligation on these companies. This leaves the sector with a scope of outperformance in a falling rate environment.
The Fed recently hinted at keeping the short-term rates lower. Also, investors’ rushing into bond markets buoyed by a risk-off trade sentiment pushed the long-term yield lower. This has brightened the high-yield charm of the utility sector.
The Zacks Earnings Trend also calls for this bullish trend. The utilities sector is expected to score the biggest earnings growth (14.1%) in the first quarter among all 16 S&P 500 sectors. The biggest utility ETF Utilities Select Sector SPDR ETF (NYSEARCA:XLU) gained 5.22% in the last one month and is currently trading very close to its 52-week high of $42.22. The product has added about 12% since the start of the year.