by Johnson Research Group | March 14, 2013 8:58 am
Utility stocks have been heating up over the last two months as some investors have been bulking up on defensive positions. For the month of February, the Utilities SPDR (NYSE:XLU) gained 2.3%.
That performance has XLU as one of the top three performers among the SPDR series exchange-traded funds … and all three of these ETFs paint two scenarios of how investors are positioning themselves.
Scenario One: Despite the market’s persistence in running higher, it appears some investors have been posturing a little more defensively as the consumer staples, insurance and utilities SPDRs garnered attention and increased bids. For the most part, these sectors — with the exception of the Insurance SPDR (NYSE:KIE) — are the lowest-beta investments among the SPDR offerings, meaning that they represent a relatively safe shelter if the market starts getting choppy.
Scenario Two: Bond investors have been plowing money into bond funds at an epic rate for more than a year as they forage for yield. Now, with the economy starting to grab some footing, the interest-rate risk of holding intermediate- and long-term bonds is on the rise. We might only be in the beginning phases of a migration from traditional fixed-income investing via bond funds to dividend yield investing as an alternative to lower-interest-rate risk in investor’s portfolios. If that is the case, then those SPDRs (and other ETFs) that provide healthy dividend yields will be in the crosshairs of the investing nomads searching for income yields.
So, with February performance a distant memory and March performance for the XLU and XLP somewhat lagging, the question of whether investors should continue to hold these groups is pressing.
Either (or a combination) of the two scenarios painted above is good for a few of the SPDRs listed in the accompanying tables.
We expect to see the dividend-yielding stocks garner even more attention during 2013 as Ben Bernanke is likely to start hinting that the Fed will have to act to keep inflation in check. This means increased interest-rate risk at a time when everyone has been plowing money into bonds. (Remember how we always tell you to avoid “the crowd”? Well, they’re parked in bond funds right now.)
With that in mind, investors would be wise to keep utility and consumer staples stocks on their radar as we expect them to outperform the market through 2013.
For now, we like the “rest” that these sectors have been taking as they continue to flash technical signs that the pause is not a selloff and migration out of these names. Consider any weakness over the short-term as an opportunity to get into these low-volatility performers before they start their next move higher.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.
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